Buying and Running a Franchise in the UK

Franchising offers entrepreneurs a way to run their own business under an established brand with a proven system, ongoing support, and reduced start-up risk. The UK has one of the world's most mature franchise markets. This guide explains how franchising works, what it costs, and how to choose, finance, and exit a franchise successfully.

1. What is a franchise?

A franchise is a licence to operate a business using an established brand, system, and support network in exchange for fees paid to the brand owner (the franchisor). The person who buys the franchise and operates the business locally is the franchisee.

Key elements of the franchise relationship:

• The franchisor provides the brand, proven business model, training, operations manual, and ongoing support
• The franchisee invests capital, operates the business, employs staff, and pays royalties and other fees
• The relationship is governed by the franchise agreement — a detailed contract that defines rights and obligations

Franchising is not the same as a distribution or agency arrangement. The franchisee genuinely owns and runs the local business within the franchisor's framework.

2. UK franchise market

The UK franchise sector is one of the largest in Europe:

• £17.2 billion annual turnover contributed by franchise businesses
• 48,600 franchise units operating across the UK (BFA NatWest Franchise Survey 2023)
• 97% of franchisees reported their franchise was profitable in the most recent survey — significantly higher than the survival rates of independent start-ups
• Over 700 franchise brands operating in the UK across hospitality, retail, care, education, property, and professional services

The lower failure rate of franchises compared to independent businesses is frequently cited by banks as a reason for their willingness to finance franchise acquisitions.

3. Costs

Understanding the full cost of a franchise before you commit is essential. Costs typically include:

• Initial franchise fee — paid upfront to the franchisor for the right to operate. Ranges from £5,000 for small home-based franchises to £500,000+ for major food service brands
• Setup costs — premises (lease premium, fit-out), equipment, vehicles, stock, uniforms, and IT systems. Often several times the franchise fee
• Working capital — typically 3–6 months of operating expenses to cover the period before the business generates sufficient cash flow
• Ongoing royalties — a percentage of turnover (not profit), typically 4–12% per month, paid to the franchisor
• Marketing levy — a contribution to the national marketing fund, typically 1–3% of turnover
• Renewal fee — payable at the end of the initial term for a new franchise agreement

Always prepare a detailed cash flow forecast and have it reviewed by an accountant before committing.

4. Due diligence

Thorough due diligence before signing a franchise agreement can save you from a costly mistake:

• BFA membership — check whether the franchisor is a member of the British Franchise Association and at what level. Non-members are not necessarily problematic but require more scrutiny
• Speak to existing franchisees — ask for a list of all current franchisees and contact them independently (not just the ones the franchisor selects). Ask about actual earnings, support quality, and any disputes
• Franchise Disclosure Document (FDD) — a reputable franchisor will provide detailed information about the franchise system, financials, and franchisee history before you sign
• Solicitor review — always have a specialist franchise solicitor review the franchise agreement. Standard agreements heavily favour the franchisor; a solicitor can negotiate key protections
• Franchisor financials— review the franchisor's company accounts (available at Companies House) to assess financial health
• Territory research — assess the territory independently: demographics, competition, footfall, planning restrictions

5. The franchise agreement

The franchise agreement is the legal foundation of the relationship. Key terms typically include:

• Initial term — usually 5–10 years, with a right to renew on updated terms
• Territory — a defined geographic area within which you have exclusive (or non-exclusive) rights to operate
• Royalties and fees— calculation basis, payment schedule, and the franchisor's right to audit your turnover
• Compliance obligations — adherence to the operations manual, branding standards, and quality audits
• Exit and resale — conditions for selling the franchise (franchisor approval, right of first refusal, transfer fee)
• Termination — grounds for termination by either party; what happens to the business if terminated
• Post-term restrictions — non-compete clauses that may prevent you from operating in the same sector for a period after exit

Franchise agreements are typically non-negotiable on commercial terms, but legal protections (notices, governing law, dispute resolution) can often be improved with specialist advice.

6. Legal framework

There is no specific franchise legislation in the UK. Franchising is governed by general contract law, with the franchise agreement itself determining most rights and obligations.

Key legal areas that intersect with franchising:

• Contract law — the Unfair Contract Terms Act 1977 and Consumer Rights Act 2015 may provide some protection, though franchisees are treated as businesses, not consumers
• Competition Act 1998 — exclusive territorial arrangements in franchise agreements may require review under competition law, though block exemptions typically apply to genuine franchises
• IP licensing— the franchise agreement incorporates a licence to use the franchisor's trade marks, copyright, and know-how; the franchisor must have valid rights to license
• Employment law— the franchisee is an independent employer responsible for their own staff; the franchisor is not vicariously liable for the franchisee's employment practices (though this can be tested in court)

7. Financing

Funding options for franchise purchase:

• High street banks — NatWest, HSBC, Barclays, and Lloyds all have dedicated franchise finance teams. For established franchises, banks lend up to 70% of total investment. You must fund at least 30% yourself
• British Business Bank Start Up Loans — government-backed unsecured loans up to £25,000 per director at 6% fixed; can supplement personal investment for smaller franchises
• Personal funds — using savings, releasing equity from property, or redundancy payments
• Friends and family — ensure any informal loans are documented and agreed commercially
• Franchisor financing — some franchisors offer deferred payment plans or in-house finance for part of the setup costs; check interest rates carefully

Banks look for: personal contribution of at least 30%, a viable business plan, a strong franchisor track record, and evidence that you have spoken to existing franchisees.

8. Running the franchise

Day-to-day obligations as a franchisee typically include:

• Initial training — most franchisors require completion of a mandatory training programme before opening, covering operations, systems, brand standards, and customer service
• Operations manual compliance — the operations manual has contractual force; deviation can be grounds for termination
• Reporting — regular financial reporting to the franchisor (weekly or monthly); often linked to royalty calculation
• Audits — the franchisor has the right to audit your premises, accounts, and operations
• Local marketing — most franchisees are required to spend a minimum on local marketing in addition to the national levy
• Field support — field support managers will visit periodically to review performance and provide guidance

9. Becoming a franchisor

If you have a proven business concept and want to expand through franchising:

• Pilot first — run at least one pilot franchise location (ideally owned by you) for a minimum of 12 months before selling franchises. The pilot proves the model is replicable and generates the data new franchisees will rely on
• BFA membership — apply for BFA membership to add credibility. The process includes a review of your franchise model, agreement, and franchisee recruitment materials
• Operations manual — document every aspect of the business in sufficient detail that a franchisee can replicate it consistently
• Franchise agreement — have a specialist franchise solicitor draft a full franchise agreement and disclosure document
• Franchisee recruitment costs — budget for marketing, franchise exhibitions, discovery days, and the time to qualify and onboard each franchisee (often £10,000–£30,000 per recruited franchisee)
• Franchisee support model — plan and budget for ongoing field support, training, a franchise intranet, and head office staff before launching

10. Exit strategies

Planning your exit before you buy is prudent — your franchise agreement will define your options:

• Resale — the most common exit. The franchisee sells the business to an approved buyer. The franchisor typically has a right of first refusal and charges a transfer fee (usually 5–10% of sale price). The franchisor must approve the new franchisee
• End of term — if you choose not to renew at the end of the agreement term, you cease trading under the brand and must comply with post-term restrictions
• Franchisor buy-back — some agreements include a buy-back clause allowing the franchisor to repurchase the business (usually at a formula price that may be below market value)
• Death or incapacity — most agreements make provision for transfer to a family member or approved manager in the event of death or permanent incapacity

The resale value of a franchise depends on its profitability, the strength of the brand, the remaining term, and market conditions. Well-run franchises in growing sectors can achieve significant goodwill value above asset value.

Key figures