Are you considering buying a franchise?
Considering Buying a Franchise?
Do you ever think about franchising your business? And if so, how to proceed?
Here is some food for thought on the subject.
What is Franchising?
Franchising is a way of doing business, in which the franchise owner – The Franchisor – assigns the right to an independent person – The Franchisee – to market and distribute his or her goods or services, and use the business name and logo, for a set period of time.
There are a number of franchise models that include manufacturing and distribution but in this article we will look at the fastest growing model, the Business Format franchise.
The relationship between the franchisor and franchisee is often referred to as a commercial marriage. Ultimately it is legal relationship with full obligations and responsibilities for both parties, outlined in a highly detailed franchise agreement.
Based on consistency, standardisation and uniformity, it is a win-win relationship in which the franchisor is able to expand his or her market presence without using his or her working capital, and the franchisee gains access to an established business system at a lower risk to starting out alone; a commercial advantage for both parties.
The business franchise is an ongoing relationship that includes product, service, trademark and the provision of an entire business concept from marketing strategy and plan, operational standards, systems and formats, initial and ongoing training, quality control and continuous assistance, guidance and supervision. In other words, all the tools of big business provided to the franchisee by the franchisor.
However, by nature, there is an imbalance in favour of the franchisor, as he or she must remain in control of certain standards, which are critical to the ongoing success of the business, otherwise the entire system will suffer.
Why Choose to Franchise?
To answer this question you need to examine your business, in order to ascertain if it is suited to the franchise model.
Here are some points to consider:
- Do you have a strong and profitable business with a proven track record?
- Have you developed your business brand to its full potential within your resources but want to do more?
- Do you have processes in place that ensure the delivery of consistent high quality products / or services?
- Can your products, sales model or service offer be duplicated and supplied to your customers by others?
- Do you want to expand your business?
- Can you share control and work with others?
- Are you in a position to dedicate time and funds to what is an arduous process?
Some Pitfalls of Franchising as a Franchisee?
In addition to receiving a percentage of the revenue, a franchise may have additional costs, such as fees for entry, training and marketing. You should carefully review the franchise disclosure documents to make sure you understand all of the fees you will be expected to pay as a franchisee.
2. Lofty Average Income and Revenue Figures:
You should be careful when relying on average figures. For example, a few very successful franchisees can make average income figures misleading. Some franchisees have much better skill sets, relevant backgrounds and quality locations. In addition, earnings may vary significantly with geography. Instead, calculate the median income of the franchise owners from your geographic region.
Similarly, gross sales figures may only tell part of the story. Even if the gross sales are high, if costs are also high, the actual profits could be disappointing. A better measure of profitability is net profits. Even then, be sure to ask whether the net profits include company owned locations as those often have lower costs.
3. A Strict Boss: One of the advantages of having your own business is the independence you have in running it. However, some franchises have strict rules on how you run your franchise, such as the prices you charge and how you can decorate your location. An advantage to buying into a franchise is they give you a playbook that is more likely to be successful than if you start an independent business, but the playbook can include restrictions as well.
4. Difficulty Leaving: It can be difficult to leave a franchise, as many franchise agreements include a non-compete provision prohibiting you from conducting similar business for a certain period of time and within a certain number of miles from your franchise location. The franchise agreement may also contain very stringent confidentiality provisions and restrictions on contacting clients of the franchise. You should ask if there is anything in the franchise agreement that would prohibit you from setting up a similar business if the franchise does not work (this is usually covered in the franchise agreement).
Depending on your assessment of these points, it might be time to look more closely at franchising. So what to do?
- Seek information from your existing advisors; accountants, lawyers, and financial advisors.
- Contact franchise authorities; the FCA and ACCC and become informed about the Franchise Code of Conduct and other relevant controls pertaining to this sector.
- Read case studies about franchise businesses in industry publications, in print and on-line.
- If you are still interested, then it might be time to get serious and call in a reputable franchise consultant. These specialists can assess if your business is suitable for franchising and can help you to develop the model.
It costs between $50,000 to $150,000 to take a business to franchise, depending on the industry and a wide range of variables. However most franchise consultants do not charge for the initial meeting.
Whilst most franchisors have a marketing support team, they often don’t do as promised and outside assistance is required. Be clear on what support is offered in writing and make sure to get the most out of what is offered, but don’t be afraid to get outside help from either/or a business coach or marketing consultant. If you need help marketing your franchised business in Bendigo or Central Victoria, contact Hall of Fame Marketing Bendigo..Back to Blog and tagged Franchising, Hall of Fame Marketing Bendigo