Buying a franchise can be an attractive path to business ownership, offering the chance to run an established brand with proven systems. But is it the right choice for you? Part 1 of our 4-part franchise buying guide examines the fundamentals of franchising, comparing it with starting your own business, and helps you determine if franchising aligns with your entrepreneurial goals.
Whether you're considering your first business venture or expanding your portfolio, our franchise lawyers can provide tailored legal guidance to support your decision-making process.
Jump to:
- What does ‘buying’ a franchise mean?
- What are the advantages and disadvantages of franchises?
- Should you buy a franchise or start your own business?
- Should you buy a franchise or an existing business?
- Can anyone buy a franchise?
- Initial considerations when buying a franchise?
- Research and questions to ask
What does ‘buying’ a franchise mean?
When you buy a franchise, the owner of the franchise business (the franchisor) sells you the right to operate a copy of their business. This is because the franchisor will give you permission to use their brand name, certain intellectual property rights and operating framework to allow you to replicate the business. You will be known as the ‘franchisee’.
In addition to selling you the operating rights, the franchisor gives you the right to use the brand name and gives you instructions on how to follow their proven business model and processes. Although you remain an independent trader, the franchisor will put restrictions on how you operate the business to preserve its reputation and identity. You will pay a regular fee to the franchisor for granting this right, and you will hopefully make a profit from running a copy of their established business.
Your responsibilities will be to pay the franchise fee, promote the franchise brand, protect the intellectual property rights of the franchisor, and keep up the quality standards expected by the franchisor. Various strict operational guidelines will be set out in a ‘franchise agreement’ between you and the franchisor, often drafted heavily in favour of the franchisor business.
What are the advantages and disadvantages of franchises?
Buying a franchise allows you to set up a business without starting from scratch. The key advantages are:
- It is generally less risky to buy a business that is already successful.
- Because the franchisor will continue to make improvements to the franchise, you will benefit from these.
- You will get the right to use a recognised brand name and trademark.
- You will get the benefit of any national advertising and promotion.
- You will get support and training from the franchisor.
- You will normally get an exclusive right to operate within a specified region or exclusive client base, so you will have reduced competition.
- It may be easier to get finance.
There are some disadvantages to buying a franchise. These include:
- Buying a franchise can be expensive as in addition to the franchise fee, you will have to buy or rent premises, equipment, and stock. You may also have to pay royalties or management fees, even if you are not yet in profit. There may also be training fees.
- There may be restrictions put on you, meaning you will have less autonomy. For example, you may not be able to change the nature of the business or pursue your own ideas.
- When you sell the franchise, the franchisor must usually approve the buyer.
- You may have to meet high performance targets, which could be difficult to achieve in difficult market conditions as Papa John experienced with their site closures.
- You will also need to carefully consider termination or your exit rights – it may be difficult to end a franchise that is not working as you imagined.
As such, it is vital to consider and weigh up these factors before entering a new franchise venture.
Should you buy a franchise or start your own business?
This largely depends on your commercial objectives and personal goals.
For example, consider factors such as:
- Ease: If you are looking for a quick start with limited risk, buying a franchise is ideal, particularly if you feel you would like support from an established business. For example, you will have an established and loyal customer base, suppliers, and other contacts.
- Freedom: If you think that you would be happy to operate the business within the restrictions and control imposed by the franchisor, then maybe a franchise is for you. Otherwise, starting your own business may be preferable.
- Costs: While buying a franchise can be expensive, starting a business can be too. For example, in addition to paying a fee to Companies House to incorporate, you may need to hire professionals to help you with the company documents. Find out more in our article Do you really need a solicitor when starting a business?
You will then also have to pay various costs for running the business.
You may also need to buy or rent premises, stock, and equipment. Even so, this may still be cheaper than buying a franchise.
Should you buy a franchise or an existing business?
Buying an existing business might be preferable to buying a franchise if you want independent control over the business, and the freedom to pursue your own ideas.
Similarly, if you are looking to turnaround a poorly performing business, then going your own way may be better than a franchise with several restrictions. However, buying an existing business also comes with its own set of risks and therefore legal advice is critical when doing so.
Can anyone buy a franchise?
Individuals, limited companies and limited liability partnerships (LLPs) can buy franchises.
If a limited company buys a franchise, the franchisor is likely to ask the directors and shareholders to sign personal guarantees so despite the ‘limited’ liability of the company structure, you may still be on the hook if the company runs into problems and owes the franchisor money.
Similarly, where an LLP buys a franchise, the franchisor will likely seek a personal guarantee from the individual partners or ask all the partners to sign the agreement as separate parties.
You do not need to be a limited company to buy a franchise. Although an individual can buy a franchise, the franchisor will generally only accept someone that shows promise of running a successful business. The same barrier would apply for any partnership, LLP and company seeking to buy a franchise.
You will need sufficient finances to buy the franchise and capital for the launch of the franchise. The franchisor may restrict the amount you are able to finance the franchise payments by way of bank loans to make sure you have sufficient funding.
While there is no age restriction on buying a franchise, in practice a franchisor may be reluctant to sell a franchise to a young franchisee as they are unlikely to have the skills and knowledge required to successfully run a business. If you are under 18, there will also be restrictions in terms of access to bank cards and credit that may be needed to run the operation successfully.
Initial considerations when buying a franchise?
You should note that there may be various initial tasks when buying a franchise, including:
- The franchisor may have a rigorous application process, including application forms and interviews. You must ensure you are familiar with this process from the outset and can meet its requirements, before investing time in the process.
- You will equally need to make sure the franchise is right for you – for instance, will the franchisor provide sufficient support and ongoing training to help you achieve success?
- You will also need to carry out robust due diligence before committing to a franchise, including consideration of the business background, financial health, and track record of franchise success.
- You will need to contemplate your strategy and goals for the franchise business, with consideration of the scope of your rights, such as territorial rights you require and then decide on whether you should pursue the venture.
Research and questions to ask
It is important that you research and fully understand the nature of franchising and the way these business models typically operate from the outset.
Thorough due diligence is key, to evaluate potential franchise opportunities and gain insights on your prospects for success. You should carry out market research and get to know the relevant brand to understand how the business operates and the risks you could face. In Part 2 of our series, we consider what 'Questions to ask and the process you can expect when buying a franchise'.
It is always advisable to consult a specialist franchise lawyer, and to do so from an early stage to guide you on the legal issues and risks you should consider, particularly when reviewing your franchise agreement and if you decide to proceed. By taking these steps, you can make an informed decision on whether franchising is the right business venture for you.
