Many successfully branded businesses are available worldwide as franchises. Although investment in a franchise is higher than an independent business, the risk (of failure) is much lower. The franchisor usually charges the franchisee royalties on gross sales in return for management support and a share of marketing expenditure.
There are basically two types of franchise. The franchisee contracts either directly with the original franchise owner or with a master franchisor. Master franchisors are able to promote sub-franchise agreements in their designated territory. For example a master franchise may cover Australia and New Zealand, so the master franchisor is allowed to sell franchises in any part of those countries. Generally franchisees experience less risk when contracting directly with the original franchisor.
Are you a suitable franchisee?
Be realistic about your suitability as a franchisee. To be a successful franchisee you need to be a committed team player with sufficient funding for the business. Prior industry experience is less important than attitude and commitment. Some franchisors actually prefer their franchisees to have no directly relevant experience in the business because re-training “mature people” can be an arduous challenge.
Do you always insist upon doing things your own way or are you comfortable following someone else’s procedures? Successful franchisees are usually more team-oriented than individual. Franchisees are obligated to conform to the franchisor’s established systems and procedures (as stated in their operations manual). Adherence to the systems ensures uniformity throughout the franchise network. If you prefer to devise your own systems and product lines you may not be an appropriate franchisee; if so, maybe you should consider starting your own business or buying an independent going concern.
Sufficient funding is essential for a franchised outlet. The franchisor will provide the business know-how, systems, training and use of the trademark, but the franchisee funds the operation of the outlet. The total investment includes not only the franchise licence fee, but also any leasehold improvements, lease security deposit, capital expenditure and working capital requirements. For example, the total investment of a 7-Eleven franchise may be £60,000, half of which is accounted for by the franchise licence fee. The franchisor usually discourages the franchisee from getting a loan to finance the investment because the loan interest increases the possibility of failure.
What are your objectives in becoming a franchisee? If it is simply to get a good return on your investment, then a franchise may not be the right investment tool for you. A franchise is an active investment that requires the franchisee’s participation in management. There are other less demanding investment vehicles than a franchise. Get involved in a franchise if you want to get a good return in the process of running an ongoing business.