Launching a business, let alone running it is arduous and not for the faint of heart. The tedious process includes coming up with the idea, developing the business plan, finding and securing investors, products source, suppliers, finding a location, hiring employees and spreading the word through marketing, advertising, and social media. Despite going through all the hard work of all the steps, there’s always a lingering chance that a single lapse could cause the entire business to fail. Just like everything else, starting a business from scratch comes with some risks.
Retail franchising lifts this burden off the shoulders of merchants and entrepreneurs by giving them the chance to own and run a business without some of these risks and mistakes startups often make. By running an already established system of operations, your business is much more proven and secured.
Why is franchise business so popular?
More and more people are hopping into the franchising bandwagon because one of its many advantages includes a higher chance of success compared to sole proprietorship. With franchises, franchisees only have to follow and be guided by an already established and proven business model. Also, support and training will be provided thoroughly by the franchisor to make sure that the store operates a certain standard. One notable benefit of franchising business that helps a lot in bringing in the income, is the brand recognition. Normally it would take years for entrepreneurs to build up a reputation and establish a solid customer base, but this will be at the least of your worries in a franchise business since it already has one. Not to mention, the ease in marketing and advertising that come with this perk.
Perhaps the biggest benefit to opening a franchise is the peer support provided by a network of fellow franchisees that can impart advice and moral support. Since you're all operating under the same brand, the success of one franchisee can help all the others. It really is the collective effort- the team work of the franchisor and all their franchisees that can ensure the success of the business.
What are the types of franchise?
There are different types of franchise businesses, entrepreneurs must be aware of when selecting which one to get involved in. It is important to know beforehand the level of financial and time commitment you are willing to invest. Franchises can be categorized based on different factors: industry, business strategy and arrangements.
|Type of franchise based on industry classification||Description||Example||Remarks|
|Job Franchise||Low investment- franchise that is perfect for entrepreneurs who want to independently start and run a small franchised business. Can also be home-based.||Travel agency, coffee van, domestic lawn care service, plumbing, drain cleaning, commercial and domestic cleaning, cell phone accessories and repair, real estate service, shipping service, pool maintenance, corporate event planning, children’s services, etc||Franchisees have to purchase minimal equipment, limited stock and sometimes a vehicle.|
|Product Franchise||Generates the highest percentage in sales. Franchisees distribute the franchisor’s products based on a supplier-dealer relationship.||Cars and car repair parts, vending machines, computers, bicycles, appliances, etc. Exxon,Texaco, GoodYear Tires, Ford, Chrysler, John Deere||Franchisor does not provide franchisees an entire system for running their business.|
|Business Format Franchise||Most popular type of franchise. Franchisees get the entire system to operate the business and market the product and/or service.||Fast food, retail, restaurant, business services, fitness||The franchisor provides a detailed plan and procedures on almost every aspect of the business, including support and training.|
|Investment Franchise||Large scale projects which require a large capital investment||Hotels and larger restaurants Exxon,Texaco, GoodYear Tires, Ford, Chrysler, John Deere||The franchisees usually invest money and have their own management team to operate the business to produce a return on their investment and capital gain.|
|Conversion Franchise||They are converting independent businesses in the same industry into franchise units. The franchisees adopt trademarks, marketing and advertising programs, training systems and critical client service standards from the independent business.||Real-estate brokers, florists, professional services companies, home-services, like plumbing, electricians, air conditioning,||The franchisor in this model has a potential for very rapid growth in terms of units and royalty fee income.|
There are four main types of franchise business arrangements:
|Type of Franchise Arrangement||Description|
|Single unit franchise||The simplest and most common type of franchise. It is an agreement in which the franchisor grants the franchisee the rights to open and operate one franchise unit|
|Multi-unit franchise||An agreement where the franchisor grants a franchisee the rights to open and operate more than one unit based on a schedule determined on the opening.|
|Area-development||Grants the franchisee exclusive rights for the development of that territory. For example, a franchisee may agree to open 5 units over a five year period in a specified territory. That territory is restricted to that franchisee, and no one else can open units in the territory during the contract term.|
|Master franchise||Franchisees have the right and obligation to open and operate a certain number of units in a defined area. Master franchisees also have the right to sell franchises to other people within the territory, known as sub-franchises. It is like being a franchisor, but in a specified territory. Franchisees may receive fees and royalties from the franchisees in the territory.|
What are the disadvantages of franchise business?
Here’s a friendly reminder to not get too carried away by all the perks and advantages of franchise. Just like any business, buying a franchise does not guarantee 100% success. By the end of the day, the failure and success of the business depends on the entrepreneur’s managerial skills and expertise. Here is a fair guide on the disadvantages and limitations you should look out for before making a purchase.
The high initial investment is one of the major drawbacks of franchising as you need to invest a huge amount beforehand to kick-off your venture. Of course this will depend on the type, scope and branding of the franchise you have selected. The business planning with a team, drafting operational manual and legal documents, and development of the franchise agreement would also entail a sum of money. Another disadvantage to keep in mind if you are an entrepreneur who is looking to be creative in operating their business, is the creative limitations that come with it. If you would like to explore uncharted territories in your business operations and potential, franchise business may not be for you. The parent company will be imposing several standards and restrictions in the way of a new franchise and you will have no choice but to abide with all the rules and regulations as stated in the agreement.
You will also be restricted in terms of supplier selection and even as the owner, you cannot sell the business without the approval of the franchisor or the parent company.
It is also best to keep in mind that one limitation of a new franchise is its total dependency on its parent company for the business plan and operating system. There will be no privacy as this setup requires you to disclose all the financial information to the franchisor who collects it to maximize royalty payments. At the early stage, you have to pay initial and royalty fees and later you have to share a part of your profit with the parent company.
If a few of these points bother you and do not coincide with your business style, then it will be good to think twice and hard about making the franchise purchase.
Although the list may seem endless for all the reasons why you too should get into franchise business, it is highly encouraged that you take your time in knowing the disadvantages along with advantages before hopping into this world. Understanding the issues will help you greatly in addressing related problems in the future. Hearing all the success franchise stories may seem tempting but never make a decision overnight. Evaluate the pros and cons and weigh your options well. Franchising is no doubt an interesting and promising opportunity but is it suitable for your business goal and objective is the main question.