What You Need to Know Before You Get Into Franchising
Franchised businesses are everywhere. Americans are so bullish on franchising that financial analysts have started referring to it as the ‘wave of the future’. More than 1/3 of the total sales in the American retail market are now made by franchised businesses, and over 7 million people are employed by this sector. The American landscape is dotted with more than half a million franchised businesses.
Franchising is immensely popular, mainly because it is a concrete route for people to become business owners of an established brand. There are significant amount of people who believe that by buying a franchise, they can become millionaires. Of course, that is not always the case. Like any other business model, franchising has its pros and cons.
How do you know if franchising works for you? Here are a few things you need to consider before plunging into the franchise business.
PROS OF PURCHASING A FRANCHISE
Perhaps the biggest advantage is that the franchisee can benefit from the promotional and marketing activities of the franchisor. However, it is worth noting that usually the franchisee is the one contributing to these costs.
The franchisee can use the copyrights, trademarks, trade secrets, patents, and secret formulas owned by the franchisor.
The franchisee can benefit from the continuous research and development of the franchisor.
Good franchisors offer training to franchisees. These training sessions are usually held at corporate headquarters. During these sessions, the franchisees will be taught about daily operations, pre-opening procedures, hiring practices, marketing techniques, and software use etc. On-site training at the franchisee’s location is also provided.
It is relatively easy to obtain the capital required for buying a franchise. Buying a franchise often costs less than starting a similar business from scratch.
Franchises have an established image and reputation. They are based on a proven management model and have access to national level advertising and support.
You can manage a franchise even if you do not have any experience because franchisors offer training.
No matter which franchise you want to go for, the franchisor will have developed a system to enable you to replicate the business model easily. The system should include standard operating methods and procedures.
The support staff is based at the corporate headquarters of the franchisor. They help franchisees whenever they face problems. They help with marketing, sales, technology, operations, and real estate. Some franchisors also have field representatives who visit franchisees at their store locations.
CONS OF PURCHASING A FRANCHISE
Royalty fees and start-up costs are the main problem that most franchisees face. Every year, the franchisee has to the pay the franchisor 12.5 percent of the sales. You may be quite successful at running your business and earning money, but you still have to share your revenue with two partners: your franchisor and Uncle Sam.
EXORBITANT COSTS OF RAW MATERIALS
The franchisor wants to maintain the quality of their offerings. As a result, many of them insist that the franchisees purchase raw materials from them or their supplier. In either case, the prices charged by the company or their supplier are usually higher than the market price of these materials. Take fast-food franchisees for instance. They often must pay up to 10% above the market price for a box of tomatoes, lettuce, or other items that are readily available everywhere. The premium that the franchisee pays for raw materials easily adds up.
A STRICT BOSS
Perhaps the biggest advantage of running your own business is the freedom to implement your own rules. However, many franchisors impose strict restrictions on their franchisees. They decide what prices the franchisee should charge and how they should decorate their location.
A franchisee has access to a business model that has already been successful in other markets. When you launch your own business, there is no way you can predict whether that is going to be successful or not. Running a franchise is different than running your own business. When you run your own business, you are the boss and you have unlimited freedom. When you run a franchise, you aren’t the real boss. You must follow the rules dictated by the franchisor.
Noncompetition clauses are built into nearly all franchise agreements. As a result, a franchisee cannot start a similar business of their own after the termination of their franchise agreement. Consider this situation. You buy a hamburger franchise and run it for several years. Then one day you decide to start a higher quality burger joint of your own. With the agreement you are forced to sign, this won’t be possible. The noncompetition agreement prevents former franchisees from starting their own business and competing with the franchisor, so you may be unintentionally limiting your opportunities when you buy a franchise.
NO SUPPORT FOR INDIVIDUAL CREATIVITY
Franchises seek uniformity. All franchises offer the same products, have the same signage and in-store decoration. The franchisor even decides what uniform the employees should wear. As a result, you will be unable to experiment with your creativity.
So if you are driven by the desire to be your own boss, running a franchise probably isn’t the right decision.
Running a franchise makes sound business sense. However, you must consider several things before purchasing one. If you are interested in buying a franchise, you have to get information about the company and its products. Even if you have a great location and a great product, there is no guarantee that you will be successful, make sure to weigh the pros and cons before signing up.