How Franchising Works | Examples from McDonald's

Summary

This video explores the concept of franchising, detailing the relationship between franchisors and franchisees. It highlights the advantages of purchasing a franchise, such as leveraging an established brand, lower risk of failure, and access to training and support. Successful examples like McDonald's illustrate these benefits, with average UK sales ranging from £1.5 to £4.3 million. However, the video also addresses significant drawbacks, including high initial investments, ongoing fees that can reduce profits, and limited operational control for franchisees. Overall, franchising offers a low-risk entry into business, though it comes with notable costs.

Takeaways

• 😀 A franchise involves a franchisor with an established brand and a franchisee who pays for the right to operate under that brand.
• 🏆 The main benefit of purchasing a franchise is leveraging the franchisor's reputation, recognized branding, and established customer base.
• 🍔 McDonald's is the most successful franchise globally, with over 90% of its restaurants operating as franchises in more than 100 countries.
• 📈 Franchisees face lower risks of failure compared to starting a business from scratch due to the proven track record of established franchises.
• 💼 McDonald's franchises see average annual sales between £1.5 million and £4.3 million, highlighting the profitability potential.
• 🛠️ Franchisors often provide extensive training and ongoing support to franchisees, ensuring their success within the business model.
• 💰 Investing in a McDonald's franchise requires a significant initial cost, ranging from £350,000 to £1.8 million in the UK.
• 📉 Franchisees must pay ongoing fees, including a percentage of net sales (12.25% to 21%) and additional marketing contributions, which can reduce profits.
• 🚫 Franchisees have limited control over business operations, including product range, pricing, and marketing, as these are dictated by the franchisor.
• ⚖️ While franchising offers a lower-risk path to business ownership, it comes with high costs and ongoing fees that must be carefully considered.

Q & A

What is a franchise?

A franchise is a business model that involves a franchisor and a franchisee. The franchisor is a business with an established brand and business systems, while the franchisee pays a fee to operate under the franchisor's name and use their business systems.

What are the key benefits of purchasing a franchise?

The main benefits of purchasing a franchise include leveraging the franchisor's established brand, reputation, customer base, and business systems. The franchisee can bypass the process of building a brand and benefit from a proven business model.

Which are some well-known examples of successful franchises?

Some well-known examples of successful franchises include Starbucks, Subway, Skechers, and McDonald's.

Why is McDonald's considered one of the most successful franchises?

McDonald's is considered one of the most successful franchises because over 90% of its restaurants are franchises, operating in more than 100 countries. It has a proven track record and consistently generates high sales.

What advantage do franchisees have when purchasing a franchise like McDonald's?

Franchisees of McDonald's benefit from an established brand and reputation, reducing the risk of failure compared to starting a business from scratch. The business model is already proven to generate substantial sales.

What kind of training and support does McDonald's offer its franchisees?

McDonald's offers a comprehensive training program before franchisees take control of their restaurants. This program helps them build knowledge, gain experience, and learn the necessary skills. Ongoing support is also available, including assistance with marketing and advertising.

What are the costs involved in purchasing a McDonald's franchise?

The cost of purchasing a McDonald's franchise in the UK ranges from £350,000 to £1.8 million. This amount covers the franchise rights and equipment, but additional ongoing fees are also required.

What are the ongoing fees that McDonald's franchisees must pay?

McDonald's franchisees must pay several ongoing fees, including between 12.25% and 21% of net sales as a franchise fee, a 5% monthly service fee, and a 4.3% contribution to the marketing fund. In total, these fees can amount to 30.3% of net sales.

How do the fees for operating a franchise compare to running an independent business?

The fees for operating a franchise like McDonald's can significantly reduce the franchisee's profit margin. In contrast, when running an independent business, the owner has full control over costs, profit distribution, and decision-making without sharing a large portion of profits.

What limitations do franchisees face in terms of control over their business?

Franchisees have limited control over key aspects of the business, such as product range, pricing, and advertising. These are set by the franchisor to maintain brand consistency across all locations.