| Home
Terms of Use
Privacy Policy
Copyright ©2000-2011
Interpublishgroup ltd.
|
Franchising
Opportunities - What you have to do to Evaluate Franchise
Opportunities
Starting
out as an entrepreneur is difficult and does involve
considerable risks. Many people select buying into a
franchise as a way to reduce the risks. The general
feeling is that with a franchise you are not totally on
your own. You buy yourself into something that already
has a track record of success. That is why franchises
are a favorite way to become an independent entrepreneur.
Statistically,
franchises have a good record of surviving as business
start-up's. A total of over 25-35,000 new
franchises related businesses open every year
(2001-2009). And they have a high survival rate! A study
of the Small Business Administration shows that
70% of independent businesses cease to exist within 5
years of opening. Only 12% of franchises fold in the same
time period. That's only 17% of the failure rate of
independent start-up's.
A
franchise is a way to buy yourself into a business that
is, in principle successful. Naturally,
depending on the type of business, location and other
factors will also play a part. But some basic
elements like organization structure, sometimes suppliers
and strategic elements, such as marketing, definition of
a product, branding, staff training, etc., have
been taken care of by the seller of the Franchise, thus,
reducing risks.
For the use
of these business elements or ideas, you will
have to pay the Franchisor an ongoing fee, often referred
to as a Royalty. In addition, you will, most likely, have
to conform to other characteristics of your franchised
business. In other words your creativity within
your own business is strictly within limits! You should
remember, that the strength of the Franchise is
determined by the uniformity of its products. If
you go into the Hilton Hotels, you do not want to see a
room that looks like a Hampton Inn, or vice versa.
For an
initial entry fee, anyone who is accepted
by the Franchisor, can buy into
the franchise with a proven brand, tested
marketing strategy, and presumably an existing customer
base. The initial fee will depend on the business which
can range from hotels, to fast food chains, florists,
copy shops, and a variety of other businesses, The
challenge is to choose the right franchise for your
circumstances and abilities.
There
are a number of key variables that you
should consider, when selecting a franchise, as shown
below.
| Key Issues
when considering a Franchise |
| Your Abilities (Your
Strengths and Weaknesses) |
Your own
abilities are obviously a key to acquiring the
right franchise for yourself. At the very least,
you will have to manage the people who will do
the work (e.g. restaurant, copy shop etc). But,
normally you will be the person who has the
technical know-how, or can acquire it, through
the training the Franchisor offers. |
| The initial Costs
of Entry |
This is
an obvious element and it is usually the number
one factor in choosing a franchise! The costs of
franchises can run from a few hundred Dollars to
millions. Therefore, when selecting a franchise,
you have to identify the opportunities
you can afford. Although,
there are sources of finance available for
franchises, be sure about two things
- that you do not
over leverage your purchase
(i.e. take on too much debt), and
- remember, that you
have to supply some collateral of your
own, in almost any financed
franchise deal.
Make
absolutely sure what your price range is
before you make a short list of possible
franchises, that you consider.
|
| The Royalties |
The royalties
you pay on your ongoing sales can vary
considerably from franchise to franchise.
Royalties should not be at a level that they
could potentially destroy your business. You
will, after deducting your operating costs and
your royalty payments have to be able to
make a decent living and sufficient funding to
enable your business to grow. Speak
with operators of the franchise so that
you know where you stand. These discussions
with franchise operators
should be at an early stage of your selection
process.
|
| The Reputation
and the historic Performance of the Franchise |
Once you
have determined the franchises which are within
your financial reach, you have then to assess the
market reputation of the Franchises you
pre-selected. A potentially
successful Franchise will it require
- a good or superior market
acceptance and
- a proven track record over
a considerable time span and
- it should also have a
continuously loyal client base.
New
Franchise opportunities may not have the historic
record of success that you are looking
for and are therefore a much
higher risk to participate in. This
should be reflected in the initial entry price
and the royalty payments charged. Make sure, that
you can live with that, if you select one of
those.
|
| Legality |
Franchise
businesses are governed by special laws in every
state here in the USA and also in almost every
country around the world. Make sure that the
franchise you are buying conforms to all legal
requirements of your location. You
should have a local lawyer look at those issues. |
| Matching
the right Franchise with the right Location |
If the
franchise involves direct physical
contact with the public, location becomes very
important. Matching the right business
with the right location is an art in itself. |
Going
through the Franchise buying process.
A a very short and incomplete
Guideline
Start
off by making a selection of the type of
franchises your would like to get involved in.
Examine them in the light of the Key
issues above and assess
your own strengths and weaknesses and what
skills, besides your financials, you can bring to
the table. Make sure that you want to
perform the type of work required from you. Once
you have determined the above. make a
list of the the five most likely franchises that
fit your circumstances. Then, approach
the franchisor and ask for an
information and documentation packet.
Participating
in a Franchise is a "two
way street". You have
to like the type of franchise offered and, the
franchisor has to be sure, you are the right
person for his business. The Franchisor will
therefore like to know from you, what your
interest and abilities are and how you will be
able to promote and conduct his business. This is
normally done in a Qualification Package
that is part of the Franchise Disclosure
Documents required by the government.
Be
sure you read, not
just glance,
through it, and understand these documents
thoroughly and in every detail. If
there are parts that you do not understand, get
an advisor who will help you and explain the
parts you cannot follow. In the end, you
need a complete understanding of what is being
offered and what your obligations are.
| Tasks
which you need to do before
you purchase a Franchise |
| Research
the Industry you are Franchising into |
Find out
everything about the industry sector in
which you want to buy a franchise,
e.g.hotels, fast food, other restaurants,
copying, couriers etc. Look at
the risks and ask yourself what you are
left with under the worst
circumstances of failure: What is my exit
strategy and what will I be left with for
the payment of my franchise fee under
these circumstances? |
| Prepare a
set of questions for other Franchisees in
the Industry. |
This is a most
important task, since it lets you
confront other people working in the
industry. It is important, that you
should be able to interview four to five
franchisees, before you meet the
franchisor who wants to sell you the
franchise! Ask them about
everything, from the quality of training
to the product support, to marketing of
the brand, to the flexibility of the
financial arrangements (especially when
you are not doing so well!), to the
responsiveness of the Franchisor to
normal organizational or business
problems. Also ask them about
failures in their franchises,
what happened to those people and why do
other franchisees think they failed! Be
careful that you separate rumors from
fact! A series of important questions
should center around what the key factors
of success and failure in the business
are: people? location? product support,
etc? You should do all of that in
writing, so that you can refer to it
later on. |
| Prepare a
set of questions for the Franchisors |
Once you have
completed the above, you should be able
to prepare a thorough set of questions
for the franchisor. Make sure
that in the end you walk away from the
meeting with a fundamental understanding
of what you buy, what your
responsibilities are, how you have to
fulfill them and what the franchisors
commitment to you, the franchisee, will
be. This understanding has to go
over and above the legal agreements you
sign. Make sure you understand
the training and support side
and whether you have to make additional
financial sacrifices for additional
training. You should, at
this stage, be able to get the text of
the franchising agreements, so that you
can evaluate them. Don't be
surprised if you see that the agreements
are pretty one sided in favor of the
Franchisor!
|
| Look at
competing Franchises |
Most franchises
have direct and indirect
competitors. You should look at
them and how they manage their
franchisees. This is not only a good
market research strategy, but also lets
you look at different approaches to
similar problems. |
| Select a
team of Advisors |
Now go and select
a team of advisors. But make, from the
start, clear in a written "job
description" for your own
internal use what they
should advise on. Then make a budget for
each advisor: Accountant, Lawyer,
Real Estate, who you will need
will to help you get the best type of
Franchise for your particular
circumstances. Don't waste your
money and time on advisors.
Therefore, define what you want from them
clearly and before you talk with them. |
| Select
your Location and/or Team of
collaborators (associates) |
The location
of your business might be crucial for
your success, for instance, if
you franchise a fast food or restaurant
business, a copyshop or a hotel, a
garage, a gas station or anything of that
nature. Similarly, the skills and
aptitude of your team of associates or
employees may be a key factor in the
success or failure of your franchise
venture. |
Then, based on all of the above,
make your final selection and get the Uniform
Franchise Offering Circular from your
desired Franchisor. Make sure that the franchisor
you want to team up with is licensed in your
state. Then, read and re-read the Offering
Circular, get legal and
accounting advise if you do not understand
everything. When you are satisfied with
everything and have no
doubts, sign a franchise
agreement. Don't let yourself be rushed
by the franchisors.
As
part of your research go to http://www.franchisedoc.com and read
through their pages. They have some excellent
suggestions and expand on many of the points
which we have touched on. e-sbforum is not
in any way associated with that site, but highly
recommends it as a source of information.
|
Major
Benefits of buying a Franchise
Purchasing
into a franchise must bring some immediate benefits,
since, "by the nature of the beast", it also
makes restrictions on your individual business choices.
Some of these benefits are listed below. Depending on the
individual franchise, there might be others.
| The Major
Benefits of a Franchise versus an independent
Start-up |
| Buying
into a Franchise vs buying an independent
Business |
Purchasing
an existing independent business will usually
cost you anywhere between 2 and 20 times its
annual after tax earnings. Sometimes, more
than that. The initial purchase costs of a
franchise are usually a fraction of that. |
| Avoiding
some of the Learners Money |
Buying
a franchise eliminates the trial and errors you
will always face, when you start on your own.
Buying into a franchise is not facing the
"hit and miss" environment that you
work in when you are an independent start-up.
Someone in a franchise has gone through the
particular circumstances you face and experienced
it. So you are buying into a known
business path and you are up and running faster
then when you go it alone!. |
| Buying
into a known Structure and Business Model. |
You
have immediate access to advice on Site
Selection, Unit Design, Operations,
Capitalization and Marketing A good
franchisor provides instruction and support
on ALL aspects of running a business in his
industry. It is similar to being hired
and trained to open a branch for company,
except that you have a financial stake in that
company. |
| Access
to other Franchisees and their experience |
You
have immediate access to a proven, profitable
system of business and Quality Research
& Development. The fact that you
can talk to other Franchisees is an important
part of the internal information system about the
business. Something that you will not have when
you start something on your own. |
| Good
Training to be successful and nationwide
Advertising |
You
have immediate access to trained support
personnel The Royalties you pay contribute to
the funding of ongoing training. In addition, the
Franchisor is likely to carry most of the
advertising budget. While you may be responsible
for local advertising, the Franchisor will see to
it that his brand and product are known to the
public at large. |
The combination of being your own boss,
earning what you are worth, direct an operation with
visible satisfaction and achievement are important
factors in a persons motivation. Additionally, like all
small business owners you will have many tax benefits
which you will not have, if you are employed.
Even
though, buying a franchise does not make you totally
independent, many of the vagaries of employment, such as
lay off's. etc., are far more distant. If you want to
know more, look at some of the books from amazon.com
| Books and
Information on Franchising from amazon.com |
You can buy the books second hand. Just
select a reliable dealer with lots of good reviews.
Links
to other Sites about Franchising
We know
about starting a business and how to negotiate the
pitfalls of a new venture. But we are not franchising
specialists. Consequently, we have selected a few sites
that will give you further insight into the franchising
option. Take advantage of the free information on these
sites! You consult these sites at your own risk! e-sbforum does not have
a business relationship with any of the
companies/internet sites shown below.
|
