2. What Is A Franchise Business
Definition of franchising
Advantages of franchising
Deepen Your Understanding
MAKE SURE YOU MADE THE RIGHT DECISION
Franchising business is owned and operated by individuals (or their companies) called franchisors under a license from a larger company that owns the brand called franchisee. The individuals buy the right to operate this business, typically in a given territory, and agree to run the business according to terms and conditions specified by the larger company or the franchisee.
Typically, the franchisor has developed a business and proven that it works. Generally, the franchisor has taken certain risks and made upfront investment to develop a product or service, operating procedures, brand recognition, marketing guidelines, and economics. The individuals, or the franchisees, are required to carry out the business according to the guidelines specified by the larger company, or the franchisor, so that people do not have to take the same risks. In return, the franchisor, or the larger company, requires the individuals to pay a franchising fee for the use of the brand and operating methods.
Typically, the individuals are free to hire and fire, set their schedule, and operate their business but they can get significant guidance from the franchisor who has gained significant more experience in that business and has taken the initial step of figuring out what works. From the very first day, the individuals get the benefit of operating knowledge of business that can take months and sometimes years to develop. A partial list of benefits that may be offered includes:
ADVANTAGES OF OWNING A FRANCHISE
Most individuals want to buy a franchise as it reduces the effort required to start a brand new business and lower the risk. You can be your own boss but work on a formula developed, tested and proved by someone else. A franchisor like McDonalds, Menchies, or a business like that, has already figured out what works and what doesn’t. They are looking for entrepreneurs who will like to benefit from this model that they have already made successful and replicate it in multiple locations. In return, they will charge a fee upfront and a percentage of your sales on an ongoing basis. You do not need to spend time figuring out the idea or how to make it successful. You just have to apply the business model that they have already developed. You will have a product or service to sell, pricing of that product or service, estimated number of employees that you might need, type of location required, operations manual, etc. In return, they charge an upfront franchise fee and an ongoing fee based on your sales. The key advantages are as follows:
Reduce effort, time, and investment required in figuring out what works.
Exclusive territory assigned to the individual to do business in.
Benefit from a brand recognition and, many a time, a national or regional marketing effort by the franchisor.
Buying power of the franchisor, as individuals can get lower input cost.
Pricing strategy - so that the individuals know the right price, as too high a price will reduce sales and too low a price will lower profits.
Start-up support which can come in the form of site selection, hiring, and sometimes financing support.
Systems and software support, a cost that can be very high for many small businesses.
DISADVANTAGES OF OWNING A FRANCHISE
Buying an existing business can result into immediate income, however you need to consider several pitfalls. First, when buying a new business you really need to understand if the business is really earning what the seller is saying it is earning. Has he kept the book of accounts properly and truthfully? This is very difficult to figure out unless you verify the income with the main clients/customers. Sometimes this is not feasible. Secondly, in the business income, how much was the owner paying himself/herself. Were the expenses properly reported? The seller may report lower expenses to make his business look more attractive to a prospective buyer. Sometimes the seller may report higher expenses to lower the tax liability. You really need to understand this very carefully. Second issue is that there might be some business liabilities that you may not about. For example, the business supplied bad quality goods or services in the past. The new owner might get sued for this. Legal experts can help protect you, but that could be costly. Third, in many businesses the old clients may be more comfortable with the previous owner, someone who they might have worked with for several years. In this case, the new owner may experience the income drop after buying the business.
HOW TO PICK THE BEST FRANCHISE FOR ME
With over 3,000 options to choose from, the process of picking up the best one for yourself could be very complicated. However, smart individuals can follow a disciplined approach and simplify this process considerably. Such a thoughtful approach can not only lead to making the right decision on the franchise that is the best fit for you but also lowers the investment that you will have to make. Thousands of people are trying to get in touch with the franchisors to get more information. It is very hard for them to spend time with everyone. As a result most of the work has to be done by the individuals themselves and often times they do not get the full information. The purpose of this guide is to arm individuals with as much information as possible to make them a better decision maker. Following are a few issues that you should consider:
What are the growth industries?
Within those areas what are the franchises that are doing well?
How much investment is needed upfront?
What is the profit potential (the single most difficult question to get an answer for, but we may be able to help at least some of you)?
Is your territory available for that franchise?
Will you qualify? They always say that you will, but not all do.
Will the franchisor provide support in the initial set up e.g., site selection, hiring, etc.?
Is the franchisor good at on-going support? This is perhaps one of the most important questions that nobody really gets a good answer to this. We may be able to help find that answer for only a select individuals.
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