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        Franchise Business Opportunities : Pros and Cons



        Another AHBBO Article
        The Franchise Alternative

        © 2013 Elena Fawkner

        ANY new business involves risk.  The proportion of new
        businesses that fail within their first two years of
        operation is much higher than those that succeed.  Whether
        you can afford the risk of your business failing depends
        on your own individual circumstances. If you are continuing
        in full-time paid employment and your business is something
        you start in your spare time for a little extra cash to see
        how it goes before quitting your job, then you are more
        likely to be able to afford the risk of that business
        ultimately not succeeding.  But what if you've lost your
        job, taken a package, and are looking for a business in
        which to invest the proceeds of your package?  All of a
        sudden the risk of your new business failing looms very
        large indeed.

        One way of reducing that risk is to consider buying a
        franchised business.

        What is a Franchise?
        Simply put, franchising involves the owner of the business
        which is being franchised ("the franchisor") granting to the
        person who wants to offer the products and services of the
        franchisor ("the franchisee") rights to use its trademarks,
        business names, associated intellectual property, know-how,
        business systems, training systems and operating manuals in
        exchange for monetary payment in the form of an initial
        franchise fee/purchase price and/or ongoing royalty payments
        which are typically calculated as a percentage of the
        franchisee's turnover.

        Advantages of a Franchise

        -> Proven system
        The franchisor has already done the work of establishing a
        system for the business being offered for franchise.  This
        system provides you, the franchisee, with a roadmap to
        follow, hopefully to success.  The franchisor has already
        tested and refined all aspects of the business and has
        created a "business success formula" for the franchisee to
        follow.  This means that you are spared the trial and error
        of working out what works and what doesn't and are therefore
        freed to focus on "working the system", hopefully generating
        profits within a short period of time.

        -> Avoid many start-up problems
        Starting a business from the ground up requires a lot of
        time and effort just getting the basics in place.  These
        include major undertakings such as developing a reputation
        in the market place, obtaining finance to fund the new
        venture and overcoming competitive threats, as well as the
        more mundane such as what business licenses to obtain and
        what insurance cover to purchase.  The franchisor will have
        already done a lot of this work.  For example, the
        franchisor will already have developed a reputation for the
        business in the market place, will have identified competitive
        threats and opportunities incorporating ways of meeting them
        within the franchise system and will usually have already
        established relationships with service providers such as
        financiers.

        -> Existing name and reputation
        As stated above, you do not need to invest significant time
        and effort into getting your business known in the
        marketplace as the franchisor will already have done this
        for the benefit of the group as a whole.

        -> Support when needed
        You are not on your own when things go wrong.  Got a
        business problem?  Contact your franchisor for assistance.
        The franchisor will have employed many different specialists
        within its organization who are there just to assist
        franchisees successfully operate their businesses.  In my
        12 years of experience in franchising, the most successful
        franchisees are those who are not afraid to ask for help
        when needed.

        -> Group buying power
        Depending on the size of the franchise network, the group
        should benefit from being able to negotiate favorable buying
        prices because of their ability to generate volume sales for
        the supplier.

        -> Group advertising
        By contributing advertising fees into a group fund,
        individual franchisees are able to benefit from much greater
        advertising exposure than they could afford if each
        franchisee had to market their business on an individual
        basis.

        -> Greater knowledge base
        The franchisor is likely to have invested in market
        research for the benefit of the group as a whole.  This
        means the group has a much greater knowledge of their
        market(s) than does the local "independent" competitor.
        The results of this market research can be put to good use
        in the group's advertising and marketing programs.

        Disadvantages of a Franchise

        -> Restrictions on autonomy
        Because you are buying the rights to participate in a proven
        "system", the franchisor will be concerned that all
        franchisees adhere to the system and not operate outside it.
        After all, if franchisees are free to adhere to the system or
        not as they see fit, there is no point in buying into a
        franchise at all.  For this reason, for the benefit of the
        system as a whole, franchisors will generally impose strict
        controls on things such as the quality and types of products
        and services that you may offer for sale, the types of local
        advertising you may undertake, methods of dealing with
        customers, ethical conduct and the like.

        -> Pay initial franchise fee and purchase price
        There may be an initial investment ranging from a few
        hundred to tens of thousands of dollars to buy into a
        franchise.

        -> Pay ongoing royalties
        In addition to the initial franchise fee and purchase price,
        most franchisors will also charge an ongoing royalty for the
        rights to use the franchised system.  These royalties are
        usually calculated as a percentage of turnover but various
        other fee structures exist.

        -> Restrictions on ability to sell business
        Some franchise agreements can restrict quite severely your
        rights to sell your business to another franchisee.  They may
        impose strict criteria for proposed purchasers and you may
        find it difficult to find buyers who meet this criteria.

        -> May not be able to realize value for business on
        termination

        Some franchise agreements state that upon the expiration or
        termination of the franchise agreement, the goodwill of the
        business reverts to the franchisor.  This means you may have
        operated and developed a business over many years and yet,
        when the franchise agreement expires, you effectively walk
        away from the business with no further financial compensation.
        Under this type of arrangement you must understand going in
        that you are expected to derive your financial return during
        the term of the franchise agreement by way of annual profits,
        not by way of a capital gain at the end of the franchise term.

        What to Look For in a Franchise

        -> An established franchise system with a good reputation.
        -> Comprehensive training systems for both your own
        management team and other employees.
        -> A relatively harmonious relationship between franchisor
        and franchisees.  Some friction from time to time is
        inevitable in any long-term business relationship but a
        constant atmosphere of hostility, mistrust and long-running
        disputes can be a warning sign of an unstable system.
        -> Ethical business practices both by franchisor and
        existing franchisees.
        -> An inclusive "partnership" approach on the part of both
        franchisor and franchisees.  This does not mean that the
        franchisor should not impose controls on the system but you
        should look for a spirit of goodwill and cooperation,
        willingness to listen to others' ideas and a climate of open
        communication at all levels throughout the organization.
        -> Exclusive territories - although not crucial, exclusivity
        of territory (where the franchisor grants you a limited but
        exclusive territory which is yours alone) can in some cases
        be a relevant factor to the competitiveness of the business.
        It would be fair to say that it does not benefit the
        franchise system if franchisees are forced to compete with
        each other for limited business.

        These are just a few of the major factors you should take
        into consideration when deciding whether a franchise is
        for you.  Although franchising minimizes the risks of
        business failure, it cannot not eliminate them entirely and
        any decision to proceed with a franchised business should
        only be made after obtaining thorough advice from both your
        lawyer and your accountant.

        _________________________

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        ** Reprinting of this article is welcome! **
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        Elena Fawkner is editor of Home-Based Business Online. Best business ideas and opportunities for your home-based or online business.

        Copyright 1998-2017, AHBBO.com. All rights are reserved. Tuesday, 26-Jan-2021 03:06:09 CST

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