Franchising provides the entrepreneur with an opportunity to enter the world of small business without all of the risks usually associated with starting a business from scratch 1. Indeed, the popularity of franchising continues to increase, especially with the emergence of new e-business models 2.
However, as with any business start-up the franchisee (you) needs to know what the franchisor (the brand) has to offer. Also, you need to consider the costs and your responsibilities when signing a franchise agreement.
“Remember that no franchise is perfect, and that every franchisee will have things they like about the system and things they don’t like”, says Chris Myers in Forbes. But first let’s have a look what franchising is all about…
What is franchising?
Think about brand names such a Mc Donald’s, KFC, Burger King and Pizza Hut – yes they’re all franchises.
These brands flourish because a there is a formal agreement and a set of relationships that governs the way a business is operated. The franchisor usually provides members of the system (franchisees) with names, logos, products, operating procedures, and more. In return, the franchisees must pay a royalty fee, usually a percentage of the turnover, to the franchisor.
Apart from the royalty the franchisee has to pay the franchisor, there is also an initial fee, with the average around $250,000 in the USA. Additionally are training fees and travel to training the franchisee’s responsibility.
What advantages does franchising offer?
Franchising has the following advantages 3:
- Operational independence is obtained under the principle of “turnkey”, and for a lot less initial capital than for an independent business venture is required;
- Better chance of success. A franchise is usually a tried and established business, which is recognizable and reputable on the market;
- Quicker start-up time. The franchisor has all the resources, skills and experience available to get your business up running in a very short time.
- Established business concept. The franchisor has already invested its most important resources: time, money, knowledge and skills – no need to re-invent the wheel;
What are the disadvantages that the prospective franchisee should consider?
- The franchisee must comply with the set of installed and tried procedures;
- There’s not much room for creativity when buying a franchise;
- If the franchisee fails to follow procedures, the franchisor may terminate the agreement;
- Franchisees must pay ongoing royalties and advertising fees;
- The franchisees are restricted where they can do business, also what products they’re allowed to sell, and the price they may charge for the products.
Are you ready for franchising?
Before you decide to jump in feet first with franchising, it’s wise to do some self-evaluation. Please read the questions in the table and try to answer them (YES or NO) as honestly as you can…
|Does the franchise lie within your scope of interest?|
|Is it challenging enough for you?|
|Will it offer job satisfaction?|
|Will it offer capital gain?|
|Does the franchise tap into your strengths?|
|Is the job physical demanding?|
|Is the job mentally demanding?|
|Do you feel capable of handling and excelling in the business?|
|Are you able to be the “boss” in your franchise business? i.e. handle staff, manage etc.?|
|A new business is a long-term commitment. Are you ready?|
|Are you ready to work long hours?|
|Are you ready to be a jack-of-all trade?|
|Are you disciplined?|
|Are there any health or age restrictions?|
|Does your family understand the demands of a new business?|
|Will your family be willing to help you if needed?|
|Can you afford the business?|
|Are you able to raise sufficient capital?|
|Are you willing to put your assets at risk?|
|Is the business (equipment, support, training etc) worth the investment asked?|
|Do you have sufficient funds to get you through initial start-up until you are seeing a return on investment?|
|Are there any hidden costs – are you sure, have you read the franchise agreement carefully?|
|Are you prepared for any unexpected losses?|
|Do you fully understand the concept of franchising?|
|Are you ready to adhere to the rules of the franchise?|
|Have you investigated the franchise?|
|Will you feel comfortable working with the franchisor and his staff?|
|Have you spoken to other franchisees, are they happy/ successful?|
|Does the franchise have a good track record and useful service?|
Have you answered all the questions? Do you have more NO answers than YES answers? If so, then you should do more research about the franchise, or you should reconsider the opportunity.
The one thing that is in your favor when you’re buying a decent franchise is that the brand is already famous. It does however come with a price. I wonder what the initial fee and royalty are for a franchise like KFC? Plenty I suppose…
A well researched and written Business Plan helps to get your business started the right way.
1 Vinturella, J.B. and Erickson, S.M. 2003. Raising entrepreneurial capital, Elsevier.
2 Chen, Y.S., Watson, E. and Azevedo, R.F. 2014. E-Strategy and Soft Landings for Franchising in Emerging Markets, In Trends in E-Business, E-Services, and E-Commerce: Impact of Technology on Goods, Services, and Business Transactions, 148-159, IGI Global.
3 Rudančić-Lugarić, A., Herak, I. and Herak, M. 2014. The impact of promotion in franchising, Review of contemporary business, entrepreneurship and economic issues, p.284.