Franchising - Whats That All About ?
Many people take out a franchise as a means to enter business; some do it very successfully, whilst for others it doesn't work - just like any other business venture in fact.
In its broadest definition, a franchise is a licence to operate a business brand that is owned by someone else. For example many McDonalds outlets are run as a franchise by independent business owners operating under the McDonald ‘brand’. Successful entrepreneurs, such as Richard Branson, have run franchised businesses. So you don’t need to re-invent the wheel.
Types of franchise are many and varied and can cover the sale of products (eg mobile phones), the delivery of services (eg domestic cleaning), and the right to use a methodology (eg auditing of utility charges).
Some of the main reasons why people decide to take a franchise are :
1. Products and services already exist that you can supply to customers;
2. Processes already provided to help you run the business;
3. Your Franchisor will have provided you with training, including how to market and sell your business, and find new customers;
4. The franchise will usually have a brand that is already established in the market and a known entity to customers.
In short you can hit the ground running and start making money quickly.
A fee will be payable to the franchisor for use of this ‘ready to go’ business package - both an initial signing-on fee, and in many cases an ongoing fee often based on a percentage of your annual turnover.
Initial franchise fees can vary from less than $5000 to $250,000 plus, and constitutes a substantial investment.
But why has the Franchisor offered you this opportunity instead of expanding the brand and operating as a traditional business ?
In short it’s because the Franchisor would have to make this sizeable cash investment and may not have access to such funds. Often they’d have to borrow such cash at commercial interest rates, and may deem it not to be profitable for them.
So when you are evaluating a franchise you should also regard the franchise fee as a ‘loan’ from you to the business and charge it a commercial rate of interest, just like a bank would do.
Then see if you will still make an acceptable profit after you have paid this interest plus the other overheads you will incur - that test will reveal if the franchise is an opportunity worthy of your investment or a black hole that will just consume your cash.
Amongst the points to consider before taking a franchise, you should ask yourself :
· How well-known is the franchise brand in the market
· Have I got the business skills to operate the franchise
· Fully understand the franchise agreement and get it checked by a specialist lawyer
· Take references from other franchisees (including ones not provided by the franchisor)
A successful franchise offers the franchisee faster and profitable access to a market than would otherwise be possible, and offers the franchisor an alternative route than organic business expansion.
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