A franchise is a business that gives the right to another person or business to sell goods or services using its name. It does this by providing the person or other business with a licence. Buying into a franchise is an alternative to setting up a new business. Instead, individuals can buy into an already successful business.

To become part of a franchise, a new business must pay a fee. In return, it gets to join the franchise and benefit from using its name, products, training, marketing and equipment. Buying into an already established brand can help to reduce the risk of the business failing for the franchisee.

There are some important key terms to remember with franchises:

  • franchise - the right given by one business to another to sell goods using its name
  • franchisee - a business that agrees to manufacture, distribute or sell branded products under the licence of a franchisor
  • franchisor - a business that gives franchisees the right to manufacture, distribute or sell its branded products in return for a fixed sum of money or royalty payment
Map of Great Britain showing different locations of Rory's Wraps.  HQ, the Franchisor and four other locations of franchisee shops called Rory's Wraps.

Some advantages of setting up a franchise

  • the franchisee gets access to free training and marketing
  • the franchisee is part of an established business
  • it can be easier to make money
  • it is lower risk for a new entrepreneur than setting up a new business

Some disadvantages of setting up a franchise

  • the franchisee has to pay a percentage of its profits to the franchisor. This is known as royalties
  • it can be expensive to set up
  • the franchisee cannot make individual business decisions without consulting the franchisor
  • other franchises can be set up locally, which can cause competition for customers
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