What is a Franchise Business?
It's worth understanding the franchise business model so you can set up the right expectation.
Franchise is a way of structuring a business. It involves of business entity (known as the franchisor) licensing to a third party (known as the franchisee) the right to operate a business or distribute goods and/or services using the franchisor’s business Brand name and systems for an agreed period of time, in return for a fee. The franchise fee may be an upfront payment by the franchisee to the franchisor, an ongoing fee (percentage of revenue or profit) or a combination of the two. Franchising is an alternative to the franchisor building a chain of stores.
Franchising has grown all over the world in recent years, particularly in the small business sector. Its success can be attributed to the fact that franchising provides incentives to both franchisors and franchisees, as they both share in the success of the business operated by the franchisee.
Why would you buy a franchise?
There are many reasons why someone would buy a franchise. For example:
- The Franchise has a track record of success, you will join an establish and already tested system.
- There are incentives to the franchisee in owning and operating its own business. Monetary rewards are directly related to the efforts of the franchisee.
- In some respects, it is easier for the franchisee than starting up their own business. A franchise should have a brand that is well established.
- The franchisor provides supports, which minimise the risk of the franchise not operating successfully, setting up so that it is ready to open for business.
- The franchisor provides ongoing support, training and knowledge (including of their past mistakes). This may be specific to their business model or general business training in areas like marketing, merchandising and accounting.
- Buying one is generally cheaper than starting your own business.
- If the franchise sells goods, the purchase price of the franchisee is generally cheaper than if it were a stand-alone business as the franchisor should have access to bulk discounts.
- The franchisee indirectly benefits from advertising by other franchisees in the chain.
What should you check before buying a Franchise?
Buying a franchise sounds like a good idea, right?
So before you decide if it’s right for you, here are some factors you should consider before buying a franchise.
1. Demand
As is the case before starting any new business, find out if there is a demand for the product or service you intend to offer. If you are buying an overseas franchising licence, be wary that what sells well in other countries may not be equally well-received here.
2. Track Record
Just because a company offers franchising opportunities doesn’t mean it’s worth taking up. You should only look at companies that have proven themselves successful at franchising their business.
If possible, speak to current franchisees about their experience so you get a clear idea of whether the franchise is worth investing in.
3. Investment
Look at what the franchisor company will be providing in exchange for the franchise fees and evaluate the time it will take to earn your upfront costs back to determine if a franchise is a sound investment.
4. Competition Local and Global
If the franchise is a well-known brand, there may already be lots of franchisees operating in the vicinity, and not to mention other rival companies. Consider first if the franchise and industry you’re choosing is a strategic business to enter as it’ll be hard to establish yourself if there are many competitors in that market.
5. Training and Support
A major advantage of franchising is the training and support offered to franchisees. If you don’t have any entrepreneurial experience, then it is advisable to choose a franchise that offers substantial training. Some even provide on-going support even after your franchise is up and running.
With proper guidance and training, the chances of your franchise being successful right from the start will increase greatly.
6. ROI – Return of your investment
You want to make sure that your business is profitable, and you are going to get your money back, Check the revenue model of the franchise business to determine the predicted ROI of your investment. Keep in mind that it takes time to build a business.
NOTE: you may be the boss of your new franchise business, but the franchisor generally has the control on many aspects. If you’re not comfortable with this kind of arrangement, then running a franchise may not be what you’re looking for.
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