If you’re looking to begin your entrepreneurial journey with a tried-and-tested business model and a well-known brand, purchasing a franchise business could be a suitable option for you.
Understanding franchises
A franchise represents a contractual agreement that grants you the authority to establish a business and sell the products or services of an established brand. As the “franchisee,” you enter into this agreement with the recognized brand, known as the “franchisor.” While franchise arrangements can vary, they typically involve the franchisee making an initial investment and paying a percentage of their sales (referred to as a royalty) to the franchisor, in exchange for the rights to sell the branded product or service.
One common type of franchise, often referred to as a “business format franchise,” is prevalent in the fast-food industry, with McDonald’s being a prime example. In these cases, franchisees purchase the right to operate an independent outlet under the franchisor’s brand. Each new franchise outlet adheres to the same design, menu, and operational procedures as other franchised outlets within a specific region.
Becoming a franchisee
Before deciding to pursue a franchise, it’s important to consider your desired level of involvement in the day-to-day operations of the business. If you aim to generate income while limiting your working hours or direct involvement, it’s crucial to find a franchisor who allows for such arrangements (although most franchisors typically expect full-time commitment).
Franchisors have their own expectations regarding franchisees, such as the time they should dedicate to the business or their industry experience. It’s essential to assess these expectations and ensure you are willing and capable of meeting them. Conducting thorough research, engaging in negotiations, planning diligently, and fostering a good relationship with your franchisor are all key factors for success in the franchise industry.
Now, let’s summarize the process of buying a franchise:
1. Research potential franchisors
Utilize online resources and consider attending franchise seminars and trade shows. These events provide an opportunity to meet potential franchisors, ask questions, and compare different franchise formats and associated fees.
2. Seek a proven formula
Evaluate established brands with successful franchise networks. Analyze the reasons behind their achievements and assess their tried-and-tested business models.
3. Match your skills
Consider how well you align with potential franchisors. Assess what you can bring to the table in terms of business expertise and talent development and what you will gain in return.
4. Negotiate
Select a location and discuss the potential for exclusivity in the area. Negotiate terms regarding the benefits and expectations of the franchisor. Reach agreements on product pricing and the percentage of revenue you will pay as royalty.
5. Address financial and legal matters
Develop a comprehensive business plan and cash flow projection. Explore cost-effective financing options, potentially through the franchisor, as they often provide credit lines. Seek legal advice and thoroughly review all contractual terms before signing any agreements.
6. Prepare the business
Fulfill any initial fees stipulated in the franchise contract. Secure a suitable location for your business and establish accounting and software systems as agreed upon with the franchisor. Take advantage of resources and services provided by the franchisor, such as marketing support, quality control measures, talent recruitment and training facilities, payroll systems, customer service support, and guidance on relevant health and safety practices.
7. Launch and operate
Regularly report to the franchisor and fulfill your monthly royalty payments in a timely manner. This ensures ongoing support from the franchisor and prepares you for continuous quality control inspections.
Expert Entrepreneur Advice
I would strongly advise considering the following points before proceeding with a franchise:
Industry experience and full-time commitment: Buying a franchise is best suited for individuals who possess considerable experience in the franchisor’s industry and are prepared to devote themselves full-time to the business, assuming various roles and responsibilities.
Caution with franchise consultants: Be cautious when dealing with franchise consultants, as they are salespeople who work on commission based on your initial franchise payment. Their primary goal is to close a franchise deal quickly, so take your time, evaluate your options, and make an informed decision that aligns with your best interests.
In addition, keep these three factors in mind when embarking on a franchise:
Higher start-up costs: Franchises often entail higher initial costs compared to launching an independent brand. Be prepared to invest a significant amount of capital in the franchise business.
Dependency on franchisor’s reputation: Your business’s reputation will be closely tied to that of the franchisor. If the franchisor faces negative publicity or experiences reputation damage, it can directly impact your business’s success.
Reflect on your motivations: Assess your personal motivations carefully. If your goal is to build an empire that reflects your own vision and achieve individual goals, a franchise may not align with your aspirations.
By considering these factors and making an informed decision, you can navigate the world of franchising more effectively and increase your chances of success.
Types of franchises
There are three primary types of franchises, each with distinct levels of rights and different business models. Engaging in any of these franchise types requires a significant financial commitment. Let’s explore them in more detail:
1. Business Format
This type of franchise not only grants you the right to sell a well-established brand but also provides you with a comprehensive business system and support network. It is commonly found in mass-consumer sectors such as hair salons, car repair services, plumbing, and restaurants. As a franchisee, you benefit from the franchisor’s proven operational methods, standardized procedures, and ongoing guidance.
2. Product
In a product franchise, the franchisor authorizes you to sell or distribute a specific branded product, such as cars, using the manufacturer’s trade names. However, you typically do not receive the franchisor’s complete business system or support. The range of products you can distribute and sell may be limited based on factors such as region, volume, and time restrictions.
Understanding these different franchise types will help you determine which model aligns best with your interests, goals, and resources. It is crucial to thoroughly research and evaluate each option before committing to a specific franchise opportunity.
3. Manufacturing
With a manufacturing franchise, you obtain the right, usually for a fee, to manufacture a particular product or utilize associated brand names and trademarks provided by the franchisor. For instance, you might manufacture a soft drink using the franchisor’s drink flavoring ingredients. This type of franchise involves the production aspect of the business and often requires adherence to specific quality standards and guidelines set by the franchisor.
