Franchising is about cutting YOUR risks when deciding to run your own business, by jumping on the band-wagon of a proven business enterprise and name: in effect, you are COPYING a proven product AND marketing system.
What franchising is not about is being ask to pay a fee to a franchise company to become a regional representative for a new and unproven product or service: that is called 'easy pickings' and 'profiteering'.
When you buy a franchise, you will be given everything that is needed to keep the business running successfully. This will include training, customer leads, research information, equipment, suppliers and marketing tools. In addition, you will have the license to use the business name and any other patents, brandings and trademarks that the business has used.
Franchising gives you a brand that will be chosen over products that have the same function and possibly the same quality. Behind the consumer psychology of it all, people will go for a brand that they know and trust when in doubt over choosing between a range of similar products.
How Does it Work?
A successful business decides that they have the type of product and/or service that is in a fairly niche market and would be of interest to individuals who want to run their own business but do not have the ideas, desire or capabilities to set up their own business, or those who simply believe that a business selling a proven product is a sensible option for their circumstances and/or character.
The benefit to the franchisor is also capital: not having to obtain finance and then use it to fund the growth of your business is a major benefit, alongside gaining quality entrepreneurs to join in the brand building and market share grab.
A franchisor advertises the service or product
You (the franchisee) request a franchise information pack
You complete an application
The franchisor accepts your application, or with major franchises, you have a meeting
You sign an Agreement for, say, 5 years
You pay the initial fee
You receive training, resources (supplies, starter pack) and marketing help and/or advice
You start to trade
You continue to buy supplies from the franchisor (possibly at a minimum figure each week/month)
You pay a weekly/monthly/yearly service fee (or maybe not)
A proven product should be shown to have succeeded in more than one location, and also to have been shown to be capable of success in a fairly short time (the franchise product should not rely on being a family run business for, say, the last 10 years). A well-known brand name is not essential as long as the business is known to be in demand: the franchisor should have market research that shows little risk in the venture given an average area.
The Pros and Cons
Pros: Proven brand and product, your own business and own boss, product and management support, purchasing power, marketing power.
Cons: You still answer to someone, must use franchise supplies, continuing fees, local competition, lack of marketing, poor and costly service backup, renewing Agreement every 1, 3, 5, 20 years?
The 'pros and cons' are subjective as a franchise is a franchise: you enter into an agreement and you know the rules, and those rules are unlikely to suit you 100%. If you are an 'entrepreneur' you may never be able to settle into a role where you have an ultimate boss: likewise, if you are a competent manager you may relish in the opportunity of 'running' your own business with the support of a large organization!
What About Marketing?
To understand the importance of marketing look at names such as McDonalds and Kodak: they constantly promote the product and fight off any attempt by competitors to attempt to take on the market. To maintain a product as a market leader the franchisor may charge an additional levy for marketing purposes: although this charge could well be included in the original and/or service fee.
A realistic expectation for the average franchise is to see your product in the relevant marketing arena: TV, monthly glossy, national and/or local press, radio etc. Of course, local marketing is usually at the expense of you. An interesting note: you will see the large burger bars marketing "at participating stores only"!
Marketing and Advertising Costs
Although the franchisor may have agreed to providing some input to marketing and advertising costs, you will still be required to contribute the majority from the franchise earnings. The document should produce a report of how the costs of marketing and advertising is split and details of how the franchise will benefit from this. If there are other franchisees (in different areas), it should say how the marketing and advertising costs will be shared between you and the conditions for doing so: it may be that your particular business benefits more from a form of advertising then others.
A franchiser that advertises nationally will give you the benefits of being a recognized brand, and should more than compensate the attributable cost to you of such marketing by improving sales.
Sales Territory
The franchisor will have a plan that shows the maximum franchises an area will have: numbers will reflect the number of businesses and/or homes in any given area. London may have 50 franchises, Leeds 15, but a small town could only support one. You may also be 'allowed' to go onto an area that has not been taken yet, but on the understanding that you must leave this extra area when a new franchisee appears.
It is also possible for an area to grow beyond the ability of one franchisee: in such a case the Agreement might demand that you give up one part, or demand that you achieve suitable growth to fulfill potential. There was a recent incident in a local paper (less than 10,000 circulation) where two franchisees were advertising the same carpet cleaning services. The original franchisee had the area for about 2 years, as a husband and wife team, the new franchisee came into the area with FOUR vans! After a few months the new franchisee disappeared (it should never have happened, but it did).
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