Business Opportunities

Franchising

January 27th, 2010

Franchise as you know is a form of business, where the rights of the branded manufactured goods or services are given to another person against some royalty fee. Franchises are getting very popular these days especially among those who want to be entrepreneurs but are apprehensive about the hazards of starting a business. Initiating a brand new business involves going through a lot of trouble as it usually involves following a length bureaucratic procedure and spending a lot of time in filling paper work before you can even taste the success. Having completed the necessary paperwork, another lengthy process starts which entails identifying the best ways to market your products / services by building a complete Marketing and Sales Strategy. Unfortunately in most cases this process cannot be managed by one person, so usually entrepreneurs need to hire the appropriate Sales and Marketing employees or create different projects and hire freelancers.

A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor’s trade name and usually with the franchisor’s guidance, in exchange for a fee. (From InvestorWords.com)

So the fastest route to fame and profit is to adapt a franchise. You basically are just continuing the trade of an established brand. All you have to do is utilize your proficiency to enlarge its popularity. As it is already a brand you just need to focus on how your local costumers will come to know about the business and the brand that you are running. In your hunt for the ideal entrepreneurial opportunity, franchise is a good option. Let us take a look at the definition of a franchise.

Franchise Structure and Costs

The structure usually followed is simple. The one who runs a franchise business is called the franchisor and the one who buys and run a franchise unit is called the franchisee.

In reality the franchisee rents the ability to use the franchisors trademarks (including logos, colors, marking materials and marketing efforts), copyrights (in some cases), the right to sell the products and the methods used to operate the business and sell the products or services. For these the franchisee will have to pay an initial fee to the franchisor, which is usually called initial franchise fee. Depending on the type of the franchise and the Brand name this initial fee may include some additional like computing hardware and software, furniture and outfitting a store with fixtures, demonstration and /or initial products, legal services, employee training, office decoration/creation, sings as well as initial marketing material (i.e. business cards, brochures, inclusion on the corporate web site), Now depending on the brand name such initial fee could be easily be between $10,000 and $1,000,000.

Except from the initial fee, the franchisee will have to pay monthly or yearly royalties to the franchisor. These are usually calculated in the form of a percentage of the monthly/annual franchise’s income, and typical is between 4%-5% but can easily go up to 10% for large known brand. These royalties often include the marketing efforts (i.e. advertisements on TV and Radio, publicity events), equipment maintenance, employees training and business development (i.e. research on new products and markets).

The Franchisor agrees and signs a franchising contract with all franchisees (An example can be found here: http://contracts.onecle.com/buffalo-wild-wings/franchise-2006.shtml). The contract legally binds the two parties and describes what each party can and cannot do. These contracts have an expiration date (usually between 2- 5 years) and includes things regarding the products/services which can be sold by the franchisee, the location(s) on which the franchisee can operate, and in some cases bind the franchise to follow the official franchisor’s operating procedures, marketing strategy (i.e. sales, colors, logos, marketing material), preferred Vendors, dispute resolution procedures and personnel and product standards.

Selecting a Franchise

Today there are many brands, in different sectors which offer franching opportunities. Sometimes these are also referred as turnkey business opportunities. In most cases the franchisee does not need to have prior experience or expertise on the area on which the franchisor operates (i.e. .Food, Clothes, Car). The franchisor will provide the initial training and also assist the franchisee in hiring employees with the necessary expertise in the area (i.e. posting employment opportunities, collecting and analyzing CVs, performing interviews’, provide employee training). Example of industries that provide franchise opportunities are Food /Restaurant, Cafes/Bars, Education and Training, IT, clothing Industries, Services, Pet Care, Car Care and Gift Shops.

The franchise opportunity that each franchisee will opt –in depends on a number of different variables. Some examples include the local market (i.e. target group of customers), the local competition (i.e. if there are other similar businesses in the area), the franchisee experiences, knowledge and personal predictions (i.e. a franchisee with long experiences in a food chain business will probably opt in for a food related franchise opportunity).

Franchisors always want their franchisees to succeed. An unsuccessful franchisee means inability to pay loyalties fees and also a bad image for the whole brand (from bad publicity of the failed franchisee). Thus in most cases franchisors perform their own market analysis and can help you select the best location for your new business. Such market analysis helps them to identify the best location for establishing a new shop/office using statistical analysis of specific variables. Examples of such include, number of people living in the area, skills, age groups, training levels and economic status of the people living in the area, number of potential customers, distance from points of interests (i.e. schools, churches, shopping centers, government buildings), distance from competitors and owned businesses (franchisors ensure that only a specific small number, if not one, of franchisees and partners sell their products/services on a specific geographical area), area future growth (according to personal predictions and government plans).

The Advantages and disadvantages of franchising.

A franchise system has many advantages. That is why franchising is the dominating business plan over the last years. Although absolute statistics are not possible (because there are many different types of businesses in general most of research that has been done shows that the survival rate for franchise businesses is much more higher than starting a normal business (some say that in a franchise business the success rate can go up to 95% as compared to the survival rate of 20% for businesses).

The reason behind such success rates is based on the fact that franchisees work with an established brand. The services/products they offer as well as the logo and colors used are already known to the public. So the public trust to the brand they are using is already built. Along with the public trust, an established brand has also earned Banks’ trust. An, entrepreneur has better chances of getting financing in order to start a franchise shop from an established brand.

Franchisors spend a big part of their annual income on marketing (i.e. TV/Radio Spots, Events) and usually have a dedicated marketing team to design, change and implement the corporate marketing strategy. Such a dedicated marketing team with enough resources can easily overcome crisis situations whether these are brand related (i.e. a faulty product) or general (i.e. Economic Crisis).

Franchisors are always on the road for new services and products to sell and also new business collaborations. Specialized experienced business development teams, investigate in the ways to enhance the offered products/services and expand into new markets. Partnerships’ with other businesses and vendors allow franchisees to sell novelty products or being able to sell their products is specific locations (i.e. Shopping Malls, shop in shop method).

By expanding their franchisee base, franchisors can use the Economy of Scale theory and gain better prices in products and services. A franchisor which buys furniture for 300 hundred franchisees will definitely get a better price than private business which will buy a few offices for their building. Transferring such discounts to their franchisees in reality assist them to reduce their operating expenses.

In a franchising network franchisees form a team. Franchisors usually ensure to create regular corporate regional meeting and conferences. In these meetings, franchisees have the opportunity to discuss their problems and ideas. Exchanging ideas may help a franchisee to identify solutions to his problems, without the need to hire an external consultant. As an addition to this, getting ideas from people that are longer on the franchise chain with longer experience may help a franchisee in identifying new ways of expanding their sales.

But getting in a franchising opportunity is not always a panacea. A franchise has also a number of disadvantages which must be taken in serious consideration.

Control

As a franchisee in reality you are not 100% the boss of your business. Franchisers have to follow the operations manual provided by the Franchisor. Generally there are not allowed to make business decisions without getting an approval first. Such decisions may include selling products of a different vendor, selling new products, marketing the products differently and develop a custom discount policy. Such changes may be necessary in order to get established in the local market.

Cost

In most cases the cost of signing for a franchise network is much more than starting your own small business. While you can easily start your own small – home business with a really small amount of money, becoming a franchisee requires that you have an initial capital at hand. An addition to this is that as a franchisee you will need to pay the monthly or yearly loyalties regardless whether you make profit or not.

Paying more

Franchisors may force you to buy all products, hardware and even office accessories from them. Franchisees have to buy such products or services (due to the contract) from the Franchisor regardless on the amount of money they are charging. In many cases franchisors force the employees of their franchisees and to follow regular trainings on specific expensive training center. This could greatly enhance your business operating expenses.

Control

Buying and selling businesses is common for entrepreneurs. Unfortunately in franchising a franchisee requires an approval before selling the business. The franchisor needs to approve the new buyer before the sale takes place. This greatly reduces the chances of finding a good opportunity to sell the business.

Reputation

As a franchisee your reputation is closely related and connected to any other franchisee on your network (could be thousands). Bad published that is produced from any other franchisee will have an effect on your own business. Even worst if the franchisor goes out of business you may end up closing your business to.

Finally each person has his own desires, dreams and strengths and should always select according to them. As a general rule when shopping for a franchising ensure that you will invest your money in something that you know and/or that you like. Spend some time in researching the different franchising opportunities before choosing one. Ensure that the Brand you select is an established one and not a Franchising Pyramid scheme (where the franchisor collects moneys from new franchisee registrations, but never spend that money for marketing or development). And always read a franchising contract carefully. Make sure that this contract does not include overcharges for training, products or supplies, and also gives you enough room to apply your business skills (i.e. .allows you make discounts).