Studies report that while franchise businesses have an 80 per cent chance to succeed, the same percentage of independent businesses fail.
Advantage of Franchising
Entrepreneurs wishing to start their own business have two broad alternatives:
- Do everything oneself – analyze the market, develop a marketing strategy and business plan, arrange technology and finance, find premises and other requirements, comply with government regulations and hire personnel, and then start and sustain the operations attending to all operational issues; or
- Start a franchise business, where a franchisor would provide you with a marketing strategy, technology, easily recognized brand name, training and management support. And then work hard to build on this foundation.
For most, it would be advantage franchise business.
Though the term franchising has been used to mean different things like dealerships or licensing a production process, in modern times franchise business means business format franchising. Under this model, there is a transfer of a total way of doing business.
One party, the franchisor, develops technology, ways of operating, marketing, training personnel and managing the whole enterprise. Having established a formula for successful operations, all these elements of the success formula are transferred to franchisees.
The other party, the franchisee, brings a familiarity with local conditions and the dedication to make the local operation a success.
It has been found that the success rate is significantly higher in franchise business compared to independent businesses.
It must be emphasised however that even in franchise business, hard work and commitment is necessary for success. We will now look at advantage franchise (and also some disadvantages, to make it a critique on franchising).
Even though the franchisor is giving you a proven success formula, you still need hard work and dedication to make your local operation a success. Long hours of work, a lowering of living standards till the franchise business is established and other kinds of sacrifices could all be required of you.
Additionally, you would need a willingness to accept the directions and periodical inspections of the franchiser.
If you consider these as an infringement of your freedom to operate your business, you are likely to find things difficult. If you depart from the standard ways of operations stipulated in the franchise agreement, you could even find your franchise terminated.
You are responsible for local operations. You should be able to lead your team to maintain the high standards imposed by the franchisor. You should also be able to satisfy customers and handle any local problems.
So consider whether you possess the physical stamina, emotional strength, personnel management skills and the ability to interact satisfactorily with your local community. Also consider your financial situation and whether your family is willing to go along with you in accepting the sacrifices that might be needed.
Unless you have already worked in the kind of business being franchised, you would need to learn the operations involved. You must also acquire essential business skills. Provide adequate time for all these before you start.
Assess the Market
Probably the greatest advantage of franchise business is the marketing support you receive from the franchisor. Franchisors would already have done market research, and the established franchisors would also have gained considerable exposure to the market.
In franchise business, you focus on your particular territory. What would be the demand for the product or service in your territory? What is the competition? Which is the best location for your franchise business?
While you could expect considerable support from the franchisor in answering the above questions, you should take pains to understand what is being done and why. Doing a franchise business is an excellent way to learn business skills on the job. Don’t miss the opportunity.
Franchise Business Success
The critical factors in franchise business success are selecting the right franchise and working hard to make it a success. What is the right franchise?
The right franchise business is one that you could make a success, in the local environment. Check the following:
- What volumes could you expect in your territory for the product or service of the franchise buiness you are considering?
- What is the competition in this particular business in the locality?
- Would you have any advantage over the competition?
- Would your franchise business be able to compete successfully?
Next comes two specific tasks:
- Assessing the franchisor; and
- Negotiating the franchise contract.
In the US, the Department of Commerce publishes a franchise opportunities handbook. Read about the particular franchisor you are assessing. Contact a few existing franchisees of this franchisor and get their views.
Most developed countries would have similar sources that you could refer to check out a franchisor.
Understanding the proposed franchise contract, and negotiating any terms that appear unfavorable to you, are also important. This is best done in consultation with your business solicitor.
There are words and usages which might appear insignificant, until you have to go to a court of law. For example, do you know that a hold harmless clause in the contract could make you solely responsible for any breaches of local state laws?
Franchisors are obliged by law to give you full documentation about the franchise agreement in advance.
Review it thoroughly to understand:
- What exactly would the franchisor provide you; and
- What would be your obligations and rights under the agreement.
Typically, franchisors provide
- the right to use a well-known brand name,
- layout and decor of the premises,
- training in production processes,
- an operating manual with specific and detailed instructions,
- promotional materials,
- campaign participation and
- ongoing support.
In return, your franchise business would typically
- pay an initial price,
- pay ongoing royalties, and
- agree to be bound by the franchisor’s way of carrying on the business.
For example, you might have to follow the Quality, Service and Cleanliness standards laid down by the franchisor.
Check out your obligations to purchase supplies from the franchisor or other nominated suppliers. Are the prices competitive? And what fees do you have to pay for promotional support?
You should also check the clauses relating to termination of the franchise, and your rights regarding sale or assignment of the franchise business if you decide to do so. Also, what happens to the franchise if you die?
Insurance coverage is another matter you should check. What types of cover are required? What are the arrangements for taking out the insurance?
At the end of the review, you should be fully aware of the full initial and ongoing costs, the revenue potential from the franchise and the specific support the franchisor would provide. Do you now think you could make a success of the franchise business?
Now that you know the full implications, go back to the self-assessment and answer the critical questions once again. Don’t neglect to go over the proposed agreement with your attorney. Are you willing to accept all the legal implications?
Government regulations applicable to your franchise business would depend on the specific business involved. In addition to getting full information from the franchisor, go to your local council and find out the rules and regulations that would apply.
What licenses would you need? What rules and regulations would you have to comply with? How do you register under any applicable tax laws?
Under the business format franchising model, the franchisor should provide a complete business plan for your franchise business. You could review the details of the plan and see how these correspond with the situation in your territory. Discuss these with the franchisor and try to ensure that the plan is a feasible one in your context.
Start with the revenue projections and check whether you could sell in your territory the number of units assumed at the estimated price per unit. Next go into the details of the costs, and understand fully how each item is computed. Try to assess two things:
- Would the estimated levels of cost for each item be realistic in your locality?
- Has all activities and expenses needed to generate the revenue been considered? Is there any omission?
This kind of evaluation would give you excellent insights into the operations of your franchise business and the factors that go into a successful operation.
Once you have examined the profitability computations, start examining the cash flow estimates. These are different from revenues and costs. If you extend or receive credit, the actual cash receipts and payments would not synchronize with revenue and costs. So each item is examined to assess when the associated cash inflow or outflow would take place.
Another aspect of cash flow is that it includes items that are neither revenue nor operating costs. For example, you would need to pay cash for equipments, vehicles and such “incidental” requirements. The amounts and timing of these should also be incorporated into your cash flow estimates.
Summarising all these estimates, under relevant time periods, you would get an idea of any cash shortfalls or surpluses. You are now ready to develop financing plans. Check that you would indeed be able to raise the required finance, including something extra to meet unforeseen contingencies.
Under a business format franchise, marketing would be a joint endeavour involving all franchisees and the franchisor. The publicity would be planned by the latter, and costs would be shared by all.
You should clearly understand your own responsibilities – the point of sale materials you would have to display, the customer service standards you have to follow and any local promotional activities you have to undertake, for example. You should also be clear about your share of the common promotional costs.
If you want to find a franchisor who is likely to deal fairly with you, you could go to the web sites of your national franchisers’ association, or seek the help of the agency dealing with small business in your country.
Below are the Web sites of some franchisors’ associations: