Franchising is a type of business agreement that sits somewhere between buying a business and starting your own business. This is an agreement between a franchisor (Burger King, Subway, mailboxes, etc.) and you, the individual entrepreneur, called a Franchisee.
The Franchisor offers its established corporate brand, experience, knowledge, training, support and proven methodology to the Franchisee. In return, the franchisee pays an initial fee and ongoing royalties.
I bring the franchise in the context of Bootstrapping as it almost completely solves the experience / knowledge part of the limited resources equation. On the cost side, many franchises will clearly be out of reach for most startups. However, the franchise industry is so large and diverse that many have a relatively low upfront cost. Recently Contractor The magazine had an article on more than 80 franchises that required a starting cost of $ 25,000 or less. (Entrepreneur.com)
The franchise is a great business sector. There are more than 300 types of business categories that support more than 18 million employees and represent 3% of the gross domestic product (GDP) of the US There are many different categories of businesses available for franchises. A partial list of the different franchise businesses is Automotive, Business Services, Children’s Products and Services, Educational Financial Services, Food, Health Care, Home Improvement, Hotels and Motels, Maintenance, Personal Care, Pets, Recreation, Technology services and businesses, and more every year.
Jeffrey Tannenbaum, the first Wall street journal A franchise expert, he described franchises as a mixed bag. He said, “For many people, becoming a franchisee is the shortcut to prosperity, but for others, it is the shortcut to hell.”
Let’s look at the pros and cons of franchises.
ADVANTAGE
- It allows you to be in your own business with limited knowledge of the industry and how a business works. You get the benefit of the Franchisor’s proven track record of success, their training, their operating methods, their suppliers, their credibility, their ongoing support, etc.
- Some important risks of business failures are reduced.
- Quick start so that your company is operational. All facets of starting and running the business are provided to you. An entrepreneur, starting on his own, would take much longer to start.
- Expansion: If successful, you can expand fairly quickly thanks to the experience and cooperation of the franchisor. They are eager to discover successful traders who have proven they have what it takes to grow. Sometimes the Franchisor will block your expansion plans, despite their proven success. If this happens, you can take inspiration from Sam Walton, the founder of Wal-Mart. Sam’s initial entry into retail was as a franchisee of the Ben Franklin 5 and 10 Cent stores. He followed his formula and added his creativity and work ethic to become a leading franchisee. It began to expand into neighboring Arkansas cities. At first, Sam saw the advent of discount retail stores. He approached Ben Franklin’s management for permission to open a discount store under their umbrella. He was summarily fired and Wal-Mart was born. Ben Franklin’s management did not realize how profoundly they would affect the history of retail.
- Due diligence: Franchising is a highly regulated business. By law, every potential franchisee you apply for must receive a Franchise Disclosure Document of the Franchisor. This will give you details of the franchisee agreement, the financial strength of the franchisors, their list of existing franchisees and, in many cases, lists of previous franchisees. You want to know everything you can about your potential partner.
- Training it is provided to you and your employees. The learning curve of running a business accelerates.
- In most cases Advertising and marketing of the brand is provided. In some cases, you may have to contribute towards the costs of the same.
- Territory: You are assigned an exclusive franchise for a specific geographic area. No one else can use your brand in this defined area. This provision must be specifically specified in the contract.
DISADVANTAGES
- Lack of control: You don’t have the independence of a business owner. The Franchisor requires that you strictly follow its rules and use its systems. Changes require approval. You are also limited in where to buy your supplies, how to advertise, what products you can and cannot offer, volume targets, etc. The arrangement can be frustrating for a creative personality.
- Costs It can be high, both the initial fee and ongoing royalties. However, costs should never be considered in a vacuum. They should be measured based on the profits you generate.
- Royalties they are paid by volume and not by profit in most cases. Generally, this is not a great arrangement, as one party can lose money while the other benefits. Their interests are not aligned even though it is an association.
- Inequality: It is an unequal association. The franchisor has much more power. If the franchisor does not deliver on its promises of support, it may not have many resources, as most contracts favor the franchisor. Also, you may not have the money to pursue your expensive legal options.
- Sell the company it can be difficult. Let’s say you’ve been successful over the years building the franchise, and now you want to retire or change your lifestyle. In an independent business, you are completely free to sell to anyone at the price you want. This is not necessarily the case for a franchisee. Some contracts will not allow you to sell, or you will only be able to sell back to the franchisor. This may not allow you to get a fair price. Therefore, you should try to address this problem in your original contract.