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Buying a franchise: Part Two

[continued from Part One]

The advantages and disadvantages of buying a franchise

The benefits

If you want to go into business, but you lack the experience of business management or the type of business you want to venture into, why not consider buying a franchise?

A good franchise offers a complete business package including training, marketing, start-up, and operational procedures. Most franchisors do not require their franchisees to have previous experience of the business. Many successful franchisees have no business experience whatsoever, including civil servants, ex-Services personnel, and tradespeople. Franchisors are looking for motivated people with good communication skills from all backgrounds.

Business knowledge is an essential component of every successful business. Every good franchise provides access to sound business knowledge and experience. The franchisee accesses this business knowledge via training and ongoing support offered by the franchisor.

Many franchises offer strong national branding which leads to familiarity of the franchise across the marketplace. The consumer is likely to trust the products offered by a franchise which has a strong brand name. This means that a new store within the franchise network can achieve much higher sales from the outset, compared with a business operated by a sole proprietor. It can take many years to build a strong brand awareness in a country, or internationally.

The key benefit to the potential franchisee is reduced risk of business failure. Statistics demonstrate that franchisees are much more likely to succeed in business than individual sole proprietors offering a similar service.

A good franchise operates a proven business model. Any franchisee with sufficient motivation and reasonable communication skills should make a success of the franchise, unless they are particularly unlucky. The franchised business is controlled and monitored by the franchisor because the franchisor also has a vested interest in the success of all the franchisees.

Good franchisors will assist their franchisees in the following areas:

  • Assistance with identifying a suitable location for the new store
  • Support fitting and remodelling the new store
  • Well-known company name, logo and tag line
  • Access to a successful product range
  • Systematic and efficient procurement systems and stock control
  • Training for new franchisees and their staff
  • Operations manuals and business forms
  • Accounting control systems
  • Quality control procedures
  • Promotional support at launch of the new store
  • Joint advertising (and other marketing) at a national level
  • Leads and referrals from the head office (or franchisor)

In addition to the above benefits, the franchise agreement may allow the franchisee to sell the business for a large profit in the future. Alternatively, the management or ownership may be taken over by the franchisee’s sibling or other relation.

The disadvantages

Two key reasons for not buying a franchise are unsuitability of personality of the franchisee and the additional investment involved.

The cost of starting business as a franchisee is likely to be higher than starting in business independently. It may be worth the additional cost for the reduction in risk and the access to a turnkey operation.

Some people are not suitable franchisees, particularly anyone who insists upon making all the decisions. Franchises are controlled according to the operations manual and the franchise agreement. For example, the franchisor is unlikely to allow the sale of products outside the product line established for the franchise. Therefore it is necessary to conform to the standard procedures of the franchisor.

Occasionally, franchisees are resentful at having to pay large royalty fees to their franchisor when they have achieved success. They may feel that they (the franchisees) are doing all the work, and the franchisor is receiving a large share of their profits. However, the franchisee might never have achieved such success without the support of the franchisor in the first place.

The business relationship with the franchisor may turn sour. Therefore, it is essential to have an “exit strategy” which may involve selling the franchise back to the franchisor or to an outside party. Check the franchise agreement carefully, particularly with regard to any transfer fees payable to the franchisor on sale of the business. Usually, franchisors insist that all franchise owners are qualified and vetted by the franchisor, so any transferee would need approval by the franchisor.

Some franchisors may be difficult to work with; usually the same people take more from their franchisees than they are willing to offer by way of support. One disgruntled franchise licensee of a prominent business brokerage publicly bragged about how he cheated his franchisor out of numerous royalty commissions. After he had sold his franchise licence a prospective buyer of the licence reported the fraud to the franchisor. So check out your prospective franchisors and their associates carefully because the relationship is very important.

Read Part Three

PG Author: Philip Wylie

Philip Wylie is the author of How to establish a successful business in Thailand and How to make a living in Paradise. He has an extensive amount of professional experience as a company director, business manager, and several other senior positions, in various countries around the world. He is a Fellow of the Institute of Chartered Accountants in England and Wales (FCA) and has an MBA (London).
Fast Track Publishing: Philip Wylie

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