The Advantages & Disadvantages of Franchising

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									This is a guide that explains the advantages and disadvantages of franchising a
business. A franchise is an entitlement granted to an individual or to a group which
gives them the right to market a company’s goods or services within a certain
geographic territory or location. Advantages of franchising include brand recognition
and advertising cost savings. Disadvantages include costly franchise fees and the lack
of creative input. This guide can be useful for individuals or groups that want to open a
franchise and want to learn more about its benefits and disadvantages.
       The Advantages &
2010    Disadvantages of
             Franchising
                                        The Advantages &
                                   Disadvantages of Franchising

Table of Contents
Introduction .................................................................................................................................... 5
Franchising Considerations ............................................................................................................. 6
Franchising Advantages .................................................................................................................. 8
   Advertising Cost Savings .............................................................................................................. 8
   Back up and Support.................................................................................................................... 8
   Exclusivity Advantages................................................................................................................. 8
   Financing Advantages ................................................................................................................ 10
   Immediate Brand Recognition ................................................................................................... 10
   Lower Failure Rate ..................................................................................................................... 10
   Marketing Advantages............................................................................................................... 11
   Profit Advantages ...................................................................................................................... 11
   Volume Purchasing Power ......................................................................................................... 11
Franchising Disadvantages ............................................................................................................ 12
   Agreement Terms & Conditions ................................................................................................ 12
   Costs .......................................................................................................................................... 13
   Regulatory Requirements .......................................................................................................... 13
   Ongoing Support ........................................................................................................................ 14
   Other Considerations................................................................................................................. 14
Summary ....................................................................................................................................... 15




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Introduction
         Franchises are a good way to get into business quickly. They come with a brand name,
proven methods of operation and a support structure. Franchises are everywhere. Some of the
more familiar names include:
                Curves
                Dunkin’ Donuts
                McDonalds
                Mail Boxes Etc.

         A franchise is an entitlement granted to an individual or to a group which gives them the
right to market a company's goods or services within a certain geographic territory or location.
The company owner, who is the franchisor, markets the rights to the franchisee. The owner
then usually receives a fee for providing ongoing support, which means they have a vested
interest in the success of each of the franchises. Franchising is a well-known business and
commerce practice that matches owners of recognized merchandise with other businesses or
products.

         Franchising began back in the 1850's when Isaac
Singer invented the sewing machine. In order to distribute
his machines outside of his geographical area, and also
provide training to customers on the use of the machines,
Singer began selling licenses to entrepreneurs in different
parts of the country. Today many such franchise
opportunities are advertised via the Web and other media.1

         This method is readily employed by small businesses and companies as a means of
authenticating and supporting their business by having the brand name of a well-known
company associated with it. Individuals who are interested in starting their own business will


1
    Information source: http://www.evancarmichael.com/Buying-A-Business/914/Advantages--Disadvantages-of-
                        Owning-a-Franchise.html


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consider purchasing a franchise because they view this as a guaranteed success. Even though
these may be valid beliefs, purchasers must understand that not all
franchises are created equal, and everyone does not fit the mold of
being a franchisee.

       To better understand the advantages and disadvantages of
the various business styles, when considering life as an industrialist,
it is important to learn about each of the following:

             What a business opportunity is.
             What a franchise is.
             What a start up business is.

Franchising Considerations
       Buying a franchise can be a fast way to set up your own
business without having to start from ground one. Many people
who have often thought about starting their own business. They
worry that their venture will fail before it even gets started. Some
of their primary concerns are:

             Just how they will get consumers interested in their product or service.

             They will make costly mistakes because of their inexperience.

                                                        Their business concept isn’t working
                                                         right.

                                                  A franchise is basically a replica of a business
                                          that has already been established. When you buy a
                                          franchise, you purchase the rights to use the parent
                                          company's name and to sell its product or service in
                                          exchange for an up-front franchise fee. Franchise
prices will vary with each industry. The ongoing royalties are usually 3 to 6 percent of sales. The


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right franchise can give a measure of security that oftentimes will be missing from new
ventures. Before making a commitment, you are encouraged to check out some of the other
franchises to see just how successful they have been.




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Franchising Advantages
Advertising Cost Savings
       Many times products and services are advertised at a local and national level by the
main franchise companies. This practice helps to boost sales for all franchisees. Individual
franchisees do not have to absorb those costs. Many franchisers give constant national or
regional advertising. In addition, two or more franchises that are located within a close
proximity are able to pool funds and advertise together.

Back up and Support
       If a smaller business is associated and linked with a big one, there is more of a
probability that the small business will move forward successfully because of the backup and
the support they will receive. Franchise companies usually provide extensive training and
support to their franchisees in an effort to help them be successful. Many franchises are
turnkey operations, so when you buy it you get everything that is required (equipment,
supplies, instruction or training, policy & procedure manual) to start that business. In many
cases, you will also receive ongoing advice and training, and help with management and
marketing. Your franchise also benefits from:

             The parent     company’s     national   marketing
              campaigns.

             Having open communication with               other
              franchises in the network to share ideas.

             Receiving support from other franchisees in the
              network.

Exclusivity Advantages
       Because the franchisor usually will not sell additional
franchises in the same territory, you have exclusive rights in that territory. You are assisted



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with choosing the site that is best suited for you and your accounting system is customized for
your franchise.




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Financing Advantages
       Financing the business may be easier because banks may be
more likely to loan money to purchase a franchise that has a good
reputation. Bankers generally view successful franchise chains as having
a lower risk of repayment default. They are more likely to loan money based on that premise.
This can be extremely beneficial for businesses that cannot afford a lot of finance and capital
investments for their own business.

Immediate Brand Recognition
       Many well-known franchises have national brand-name recognition. Buying a franchise
can be like buying a business that already has established customers. Your business is based on
a concept that has already been demonstrated. Because the corporate image and brand
awareness is already known, consumers are more apt to purchase from affiliates of those
companies.

       Franchises often sell products that have regional, national, or even global recognition. A
hungry traveler stops at Wendy’s because they know what their burgers taste like. On that
same note, a prospective real estate buyer may feel more comfortable buying property from
Century 21 than from a company called Martha’s Marvelous Manors. This brand-name clout
helps your business in two ways:
          1. It increases revenue by bringing in customers.
          2. It lessens the amount of time and money you will have to spend on marketing.

Lower Failure Rate
       Many franchisers have succeeded for one main reason; their business models work.
Your franchiser has already had and overcome many of the problems that you will experience.
You are able to benefit from that experience and steer clear of a lot of trial and error that can
wind up being very costly.




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           When you purchase a franchise, you are buying a concept that
has already been successfully applied, which increases your possibility
for continued success. Statistics show that franchisees have a much
better chance of success than people who start out with independent
businesses. Independent businesses run a 70 to 80 percent chance of NOT surviving the first
few critical years. Franchisees have an 80 percent chance of surviving (Michael M. Coltman,
Franchising in Canada: Pros and Cons, Self-Coursel Press).2

Marketing Advantages
           When a big business is associated with a franchisor, the big-business will help with the
corporate marketing efforts of the small industry or business they are providing support for.
Having the interest of big-budget industries in a low-budget business is a very effective
marketing tactic. These franchise policies ensure the proper marketing of the small business.

Profit Advantages
           It is very easy to get the franchise up, running, and making a profit. A franchise business
can have enormous yields. Some of the more profitable chains are:
                  Kentucky Fried Chicken
                  McDonald’s
                  Pizza Hut

Volume Purchasin g Power
           Supplier relationships are already in place. Franchisers are
able to purchase parts, raw materials, and other ingredients in
bulk, and can negotiate far better deals with suppliers than a small business owner who works
independently. The cheaper supplies let you charge customers less and increase your profit
margins. Many franchises also offer purchasing that is centralized, which keeps you from having
to worry about how and where to buy a lot of your supplies.

2
    Information source: http://sbinfocanada.about.com/od/franchiseinfo/a/buyfranchise.htm


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Franchising Disadvantages
       Purchasing a franchise is a monumental investment that
does have a great many advantages. Just like the majority of
business strategies, there are a number of drawbacks that go
along with the concept as well.

       Purchasing a franchise is a complicated legal process. As
a franchisee, you pay for the right to use the franchisor's Trademarks, systems and methods.
While many franchises are legitimate and successful, there has been a history of problems with
franchises. The end result is that franchising is heavily regulated both at the state and at the
federal level. It is important to completely research any franchise concept thoroughly before
making your decision and well before signing any documents. The franchise documents that
are required by law are intended to give full disclosure to the prospective purchaser. In reality
however, these documents are huge, and full of legal jargon that is extremely one-sided in
favor of the franchisor. It is also jam packed full of restrictions and fees.

       Franchisees have to maintain the image and level of service that has already been set in
place, so they have to be very good at following directions that are explicit. If the franchisee is
not able to run a quality business or doesn’t have proper funding, this could limit their success.
Some of the most important disadvantages include:




                             Agreement Terms & Conditions
                             Reaching a general agreement on terms and conditions can be
                             tricky. There can be situations when the terms and conditions that
                             are set forth by the investors and franchisors are biased. Achieving
                             a firm deal with the companies, while safe-guarding the interest of
                             both parties can be a very complex undertaking.




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Costs
        Buying into well-known franchises is costly. If this is what you
choose, you will need to have a lot of up front capital or be able to
arrange for the financing that is required. In addition to the original franchise fee; every month
royalties and a percentage of your franchise’s business revenue will have to be paid to the
franchisor. The franchisor may also charge more fees for the services that have they provided,
like advertising costs. In addition:

       Not just the well-known franchises, but all franchises can be costly to implement.
       Implementation may wind up costing much more than you originally expected to pay.
       There is a host of early costs for purchasing the franchise.
       There are many ongoing management service fees that the franchiser can assess.
       You may be required to have to agree to purchase your products from the franchisor.
       Many franchises charge ongoing royalty fees that will cut into the franchisees’ profits.
       There are renewal requirements and fees.

Regulatory Requirements
        The main disadvantage of buying a franchise is that you
have to do it the franchise holder’s way. Certain processes must
exactly conform to their requirements all the way down to what
color straws you have to use. As a franchisee, you do not have
autonomy.

        The creative control that a small business owner has is not
experienced by an individual who is part of a franchise.
Franchisors usually require franchisees to follow their operations
manual to a tee because their primary interest is to ensure




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consistency throughout the franchise. This limits any creativity on the
part of the franchisee.

       All management decisions that are to be made must happen
after consultation with and approval from the franchisors. This limits
the authoritative control of the small business owner to a great
degree. Franchisors may exert such a degree of control that you may
wind up finding unbearable. In addition there are:

      Restrictions on certain activities (only permitted to offer items
       that have been approved by the franchise which can impact
       your local market)
      Restrictions on transferring
      Termination criteria
                                  The Franchise closely monitors:
                                      ─ Your books
                                      ─ Your bank accounts
                                      ─ Your operation

                            Ongoing Support
                                   Not all franchisors will give the level of support and assistance
                            that you may need to get your franchise up and operating
                            successfully. Much of the support given is entirely for startup
                            operations. Everything after startup is up to you. Other franchisers
                            will make promises of ongoing training and support that they don’t
                            follow up on. Also, they may make poor decisions that have
                            devastating effects on your franchise.

Other Considerations
       Buying an inexpensive franchise that is not well-known is a real gamble. Just because a
business offers franchises is not a guarantee that the franchise you buy will be a successful one.


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For some franchisers, franchising is their only business. All the franchisor wants to do is sell
more franchises. The fact that the individual franchises are or are not successful is irrelevant to
them. This does not mean that the franchises that are not well-known are not worthwhile
ventures. It is a reminder that any franchise you are contemplating purchasing must be
thoroughly investigated. In addition consider the following:

      All profits are shared with the franchisor.

      It may be hard to sell your franchise because the buyer must be approved by the
       franchisor.

      The franchiser may go out of
       business.

      Other franchisees’ bad actions can
       adversely affect the entire franchise.


Summary
       Purchasing a franchise may or may
not be a good choice for you. Before you
sign on any dotted lines, check everything out carefully. Make sure you understand exactly
what that large mountain of documents actually. Get the advice of a business attorney who is
knowledgeable about franchise operations who can help you understand all of the legal jargon
so that you can make an informed decision.

       You may want to contact a franchise consultant and talk about whether franchising is
right for you, or not. You can visit FranchiseBuyersNetwork.com and click on the Franchise
Consulting link to have a local franchise consultant contact you for a phone interview.
http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073791408.




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