Franchising is a method of starting and developing a business using a ‘tried and tested’ methodology. Much of the hard work associated with starting a new business from scratch can be avoided. In addition, you will be investing in a type of business that has worked for other people and should work for you, too, assuming that you have conducted your research thoroughly.
For many franchises, much of the marketing and administration is carried out centrally, allowing the franchisee to concentrate on boosting sales and market share locally, rather than getting bogged down with less productive administrative tasks.
Ultimately, franchisors depend on the achievements of their franchisees to make their businesses successful. So, the conscientious franchisor will continue to give strong support to their franchisees in order to ensure that the whole franchise continues to grow and the integrity of the brand continues to be maintained.
For entrepreneurs who like doing things ‘in their own way’, becoming a franchisee may not be an ideal business move. Because the franchisor is offering a package to be operated widely, franchise contracts are usually very rigidly defined, laying down strict rules and guidelines about what the franchisee must do, what the franchisee is permitted to do and what the franchisee is forbidden from doing. Sometimes these regulations may just seem petty, for example, defining the exact dimensions and colours of point-of-sale materials in a fast food restaurant; other issues, such as the way that a franchise’s financial systems operate may cause much more serious friction.
When taking on a new franchise, the franchisee is exposed to greater financial risk than the franchisor, as he or she is the one who has to rent or buy suitable premises, finance and manage stock and deal with all the issues associated with employing staff, in order to make the local franchised business a success. Many franchisees are content with the financial arrangements at the start of the franchise business cycle. But, once their individual franchises are well established and profitable, they may become increasingly resentful about the size of the percentage of their turnover or profits that they must continue to pay to the franchisor, whilst apparently receiving relatively little in return.
This leads on to consideration of another part of the franchise contract that the potential franchisee should study carefully, namely what terms and conditions apply when you want to terminate the franchise contract. Find out whether you are permitted to sell the business on to another franchisee or whether you have to sell it back to the franchisor (possibly on very unfavourable terms).
In the final analysis, the decisions to be made before becoming a franchisee are very similar to those required when starting any new enterprise or buying an existing business – is the business plan viable for what you intend to achieve?
Franchising offers great potential for rapidly building a successful business;
centrally managed marketing and administration functions allow franchisees to concentrate on generating sales;
franchise contracts tend to be very rigid, restricting the entrepreneur’s options for innovation within a franchised business;
taking on a franchise does not mean that you can dispense with the need for a comprehensive business plan.