People purchase franchises to buy themselves an income. Before entering into any franchise arrangement ask these questions:
• Will the income I can generate be justified by the capital I am investing? For this to be financially worthwhile (and assuming no capital gain) the franchise will need to pay at least as much, if not more, than you could earn from a salary plus the interest your capital would earn if invested elsewhere.
• Is there a genuine reason for buying into a franchise or could I do just as well by being independent? If the franchise network doesn’t have an established brand name, then the reasons you are left for buying into it are: know‐how, low cost supplies and equipment. But, if you already know how to do what you’d be doing in the franchise (or could acquire this knowledge from cheaper training) and you can buy all the supplies, equipment, etc. then there doesn’t seem much point in a franchise.
This is what you should be getting with a good franchise:
• A ready‐made system with all the know‐how. You just turn up and start operating. All the processes and systems are tried and tested. All the equipment, signage and supplies are there or readily available.
• A support network in place ‐ support from the franchisor – the company behind the franchise – and support from other franchise owners.
• An existing, established brand that customers quickly recognise and understand.
• Low cost supplies ‐ the franchisor can negotiate good prices on bulk purchases by centralising the buying for all the franchisees.
But there are downsides:
• First you have to buy the franchise ‐ this could be quite expensive and it'll probably result in spending more overall than starting your own business from scratch.
• Less control ‐ you'll be restricted in what you can and can't do. You'll have to conform to the standard practices and unlikely be able to branch out to new opportunities outside the standard business model.
• You'll also have to make royalty payments on all the business you do ‐ you may end feeling as if you're taking all the risk and doing all the hard work, while someone else gets to have control ... and the profits!
• Finally, there' s a risk that the franchisor doesn't live up to its promises. The opportunities might not be as good as were made out, the brand not have such a great reputation or the franchisor might just provide lousy service in terms of delivering supplies, promoting the brand or solving problems.
Two final points:
• Franchisees are not entrepreneurs. Do not be fooled into believing this is a route to starting your own corporate empire with untold riches – that’s what the franchisor gets if he’s lucky. Instead you should see yourself and view your prospects as a glorified shop‐keeper.
• What out for advisors and brokers. They may be desirable, they may be necessary, much make sure the fees being charged are proportionate to what you are going to spend on the franchise. A slick salesman can make himself sound indispensible, while all the time he’s just got his snout in your trough.
Similarly, there are advantages and disadvantages of running a franchise network.
You first need to prove your concept and establish a brand reputation. There are franchises out there with neither, and if you try to launch a franchise on the same premise you find it hard to get takers, and those you do not get might be fools for having accepted your less than salubrious offer.
But, if you’ve proven your concept and brand why franchise? If your business is doing that well can’t it grow by more conventional means, using funds generated internally to develop the expansion?
Having said that, there are certain business models that lend themselves to franchising. In principle, you should get fairly high calibre management from people who think like business owners. You might otherwise find it difficult to recruit a large number of high calibre managers as your network will probably call for many small operating units.
In reality you might end up with a few duff franchisees who manage to end up wasting a lot of your time as your attention is diverted from developing the franchise network as a whole to fire‐fighting problems the duffers create.
With the right formula you could enjoy a healthy income stream and not have to do that much work, as all the supervision and management at an operational level should be taken care of.
A franchise network can allow your business to expand quicker than would otherwise be the case. And, in economic downturns it shouldn’t be you left with the liabilities and costs of laying off staff and closing branches.
However, the reputation of your brand and quality of service provided is largely out of your control. Contracts can only go so far to ensure standards are maintained.
Also, as each franchisee is likely to have a local monopoly there is little you can do if they are not exploiting their territory to maximum benefit. Providing they meet pre‐determined criteria you probably can’t replace them with someone who would do better.
Depending on the nature of the franchise agreement, you might not be able to take back control or ownership of the franchise operations should it be desirable to do so – what if you receive a takeover bid but the bidder is only interested if he has full control over every operating unit?
February 2008
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