Starting a business can be tough, especially if you still have no experience on the business model that you plan to run, nor a good working system to back it up. Then, there is also the problem of your business not being accepted well by the market. You have to worry about the product, the packaging, the look, feel, and taste, everything…
Franchising is considered a short-cut to starting-up a business. By entering into a contract with a franchisor, you are given the right to distribute its products, techniques and trademarks for a fee. Most charge a percentage of the gross monthly sales and a royalty fee, while others, you just need to pay the franchise fee, and you are set to go.
Being tied up with a franchise can also reap benefits such as brand identification, inclusion in national or international advertisements, support services such as training and marketing materials, and of course, the raw materials or supplies.
Franchising has a success rate of over 90%., and is identified as a business model with minimal risk, making it attractive to entrepreneurs.
What is Franchising?
Coming from the old French Word of “franc”, which means right or privilege, franchising refers to the method of practicing and using another’s perfected business concept. This is a duplication process of a business, and it involves two parties, the franchisor and the franchisee.
Types of Franchising
There are two types of franchising – product franchising and business format franchising.
Product franchising (trade name franchising) is a type of franchising wherein a manufacturer grants a franchisee to sell its products, but with no method of doing business. Examples are car dealership and service stations. A royalty collection based on products is the usual method used in this type.
The Business Format franchising is a more complex form. This is a broader and ongoing relationship, wherein, not only is the franchisee granted a right to use the name, and products and services of the franchiser, he is also given a complete plan for managing and operating the business – a transfer of the proven way of running the business as developed by the franchisor.
Business Format franchising offers the franchisee the advantage of a proven trademark or formula, compared to starting a business from scratch. Franchisors can expand their business rapidly, while the franchisees are given comprehensive training, which he would not have access to, had he started on his own.
In a Business Format franchising, the franchisee is under a form of control by the franchisor in order to comply with business uniformity.
Advantages of Franchising to the franchisee:
- High success rate. Being based on a proven business model and system, the franchise has a reduced calculated risk, compared to starting from scratch.
- Recognized brand trademark. A franchise offers a recognizable name and trademark for the product or services that has become a household name.
- You are not alone. The franchisors will be passing on valuable business systems and tools which they have discovered during their operation. This coaching system enables the franchisee to hurdle past his lack of experience in operating the business.
- Ease in financing/ Re-saleability of the Franchise. Financial help for good business come easy, also, good franchises are an appreciating asset, thus maintaining its re-saleability.
- Huge Profit. Through the franchisors, obtaining lower-cost materials and supplies is possible, plus a good marketing strategy, brand positioning and growth rate, an increase in sales and profit is not that far off.
Challenges of Franchising to the franchisee:
- Control. Since franchising involves the franchisee following a business system, some franchisors impose a certain degree of control that makes following the system difficult.
- On-going cost. Aside from the franchise fee and royalty, some franchisors charge a percentage of the gross sales, or an advertising fee.
- Failed expectations. Conflicts may arise in the franchisor-franchisee relationship due to incompetence. The franchisor may not give enough support or by squeezing too aggressively for profit, or for franchisees who are too lax in adhering to the franchising agreement, and create dents in the system, later on damaging the business or the brand.
Are you Franchisee Material?
Evaluate your ability to be a good franchisee with these qualities:
- Avid learner. A franchisee must be willing to learn the training and knowledge from the franchisor.
- Effective communicator. A franchisee must be able to effectively convey your thoughts and ideas to others.
- Ample experience. General business skills, such as marketing, sales or administrative expertise will come in handy.
- Financially capable. Financial capability is essential in making a franchise fruitful, and the required money must be complemented with proper financial planning to run the business until it breaks even.
- Awareness of the brand. The seriousness of the franchisee on the franchise is measured by his awareness of the brand.
- Open to new ideas. A good franchisee must be open to new ideas that the franchisor will impart to improve the business.
- Ready to follow. A franchisee must be willing to follow the prescribed set of rules and regulations contained in the franchise agreement.
- Original thinkers. Though being a good follower is necessary, a franchisee must also be able to think for himself. However, franchisors are to be consulted first at every stage of introducing a new change in the system.
What should I consider before buying a franchise?
Due diligence should be made before going into a major decision in life, such as going into business. In buying the right franchise, careful considerations on the following is very important:
- Ask yourself why you want to own a franchise.
- Begin the search. Look for opportunities that are in harmony with you and that greatly interests you.
- Research
- Have a complete understanding of the business
- Check on the business experience and track record of the franchisor
- Determine the type of experience required in the business; the hours, the personnel commitment necessary to run the franchise; how much money is to be invested; and the terms and conditions of the franchise agreement.
- Get information on the franchise by visiting stores; and interviewing the franchisors and existing franchisees.
- Concept. Look into the product and services and discern what makes it stand out among other business/
- Location, location, location. Ask about the territory rights. Make sure you got a good site selection.
- Labor pool. Check on the depth and quality of the franchise’s labor pool, making sure it provides strong and qualified workforce.
- Training and Support. Determine what kind of support and clarifying that support will continue after the grand opening.
- Investment amount. While the upfront cost may seem expensive, in the long run, it probably is not. A more significant expense can be the ongoing royalty and marketing fees.
- Exit strategy. Determine if there are resale options should the opportunity does not work.
- Franchise Agreement. Finalize a franchise agreement, and it should detail the rights and obligations of both parties.
References:
http://en.wikipedia.org/wiki/Franchising
http://www.pfa.org.ph/?page=aboutfranchising
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