Stay updated on our latest
articles with RSS
WHY BUY A FRANCHISE? ARE YOU JUST MAKING SOMEONE ELSE RICH?
One of the most attractive methods of starting a new business is to buy a franchise. For a variety of reasons the attraction is easy to understand. The purpose of this article is not to go over them all again, since they are well-known (and are laid out in my book 'Real World Franchising' in any event!).
However it can be a real benefit to franchisees if they understand the benefits of franchising for the franchisor.
'What do I care why the guy is making the offer, I only need to know what the offer actually is'.
That is one view which some people take when looking at the business of buying a Franchise. On one level of course they are right, but believe me, if you don't make some attempt to understand what's in it for the person on the other side of the table you are needlessly hampering yourself when looking at the business. I have listed below some of the advantages that accrue to the Franchisor, but before going into them let's just consider what the Franchisor is really doing first. The advantages of franchising for a franchisor can be summarised as:
1. The growth of the network is achieved using the financial and manpower resources of the franchisee;
2. The franchisor need not be concerned with the day to day operation of each outlet;
3. The franchisor's organisation can be compact and can earn profits without involvement of high capital risk;
4. The network has an ability to grow rapidly;
5. The franchisor has fewer staff and fewer staff problems;
6. The management of each outlet is the hands of an owner who will tend to be well motivated to be successful;
7. Franchising provides wider secure outlets for products and services;
8. It enables the franchisor to service national customers using their network of outlets. The list is important in itself but the underlying factors that the list highlights are equally important:
It shows very well that the Franchisor has at least as much to gain from the Franchise operation as you have. This means that your approach to Franchisors need not be that of the cringing supplicant who is begging to be granted the right to become a Franchisee. You are the owner of some things that the Franchisee is very keen to get hold of, namely your skill, capital and motivation. Ensure your approach reflects this.
Secondly you should bear in mind that the Franchisor will not have a business without people like you. This means that the Franchisor will be keen to get you signed up. If this means sometimes that some things get glossed over and results get presented in the best conceivable light, then it's not that surprising really. You are not the only side in this negotiation with plenty to lose. Bear that in mind when reviewing the claims of success made in the glossy brochure.
Of course so far, we have assumed that the Franchisor is someone ethical and business person who feels that the Franchise operation is the best way for their company to grow and flourish.
However it is an undisputed fact, even by the Associations charged with regulating and promoting Franchising worldwide, that there are several Franchise opportunities advertised each year which are out and out scams. That is as least part of the reason why the trade associations exist! Rest assured that if you follow the approach laid out in my book, you should see enough warning signs to ensure your money remains safely in your pocket, nevertheless though, you have to keep this is the back of your mind.
The Franchisor should have a good business that will reap greater benefits through expansion. Their attitude should come across as being interested in the business and how it operates rather than the Franchise element per se. The Franchise ideally can be summarized as a means to an end, rather than an end in itself. No greater indication of this approach is in the level of the Franchise fee that you normally have to pay for the Franchise. While the franchisor will expect a fee, that fee shouldn't be disproportionate to the other investments you will have to make.
In a capital intensive Franchise you will need to invest substantially in setting up the business and the initial running costs. Let's face it every pound you have to invest in buying the Franchise is a pound less available for the business itself. Even in those franchises where there is not such a large element of investment in plant and machinery, the Franchisor should regard your business as a long term prospect. After all if you are handing over a significant proportion of your Sales revenue each month to the Franchisor they are going to benefit greatly in the longer term. Why would they feel the need to take a huge initial fee from you? Could it be that they don't regard the future income stream as certain enough?
Some Franchisors argue that they need evidence that you have adequate capital behind you, in order that you can sustain yourself in the initial phase. The initial payment is therefore a type of capital adequacy hurdle that has to be overcome. Hopefully the gaping hole in this argument is clear! Leaving on one side the less arduous alternative of just getting the prospective franchisee to prove their net worth, it cannot help a new Franchise if the initial capital available to put into the business has to be depleted in this way.
Quite frequently the initial fee is split into various elements and therefore can appear more acceptable. For example the purchase of initial stock and a charge for Training seems much more acceptable. Just be aware that the charges are all distinguished by one element. Despite the change of description, the destination for the cheque you write does not vary! However you should be able to get a detailed breakdown of the services and goods being purchased in advance with your money. Just make sure that the pricing is realistic and the process is not just window-dressing.
One of the most attractive methods of starting a new business is to buy a franchise. For a variety of reasons the attraction is easy to understand. The purpose of this article is not to go over them all again, since they are well-known (and are laid out in my book 'Real World Franchising' in any event!).
However it can be a real benefit to franchisees if they understand the benefits of franchising for the franchisor.
'What do I care why the guy is making the offer, I only need to know what the offer actually is'.
That is one view which some people take when looking at the business of buying a Franchise. On one level of course they are right, but believe me, if you don't make some attempt to understand what's in it for the person on the other side of the table you are needlessly hampering yourself when looking at the business. I have listed below some of the advantages that accrue to the Franchisor, but before going into them let's just consider what the Franchisor is really doing first. The advantages of franchising for a franchisor can be summarised as:
1. The growth of the network is achieved using the financial and manpower resources of the franchisee;
2. The franchisor need not be concerned with the day to day operation of each outlet;
3. The franchisor's organisation can be compact and can earn profits without involvement of high capital risk;
4. The network has an ability to grow rapidly;
5. The franchisor has fewer staff and fewer staff problems;
6. The management of each outlet is the hands of an owner who will tend to be well motivated to be successful;
7. Franchising provides wider secure outlets for products and services;
8. It enables the franchisor to service national customers using their network of outlets. The list is important in itself but the underlying factors that the list highlights are equally important:
It shows very well that the Franchisor has at least as much to gain from the Franchise operation as you have. This means that your approach to Franchisors need not be that of the cringing supplicant who is begging to be granted the right to become a Franchisee. You are the owner of some things that the Franchisee is very keen to get hold of, namely your skill, capital and motivation. Ensure your approach reflects this.
Secondly you should bear in mind that the Franchisor will not have a business without people like you. This means that the Franchisor will be keen to get you signed up. If this means sometimes that some things get glossed over and results get presented in the best conceivable light, then it's not that surprising really. You are not the only side in this negotiation with plenty to lose. Bear that in mind when reviewing the claims of success made in the glossy brochure.
Of course so far, we have assumed that the Franchisor is someone ethical and business person who feels that the Franchise operation is the best way for their company to grow and flourish.
However it is an undisputed fact, even by the Associations charged with regulating and promoting Franchising worldwide, that there are several Franchise opportunities advertised each year which are out and out scams. That is as least part of the reason why the trade associations exist! Rest assured that if you follow the approach laid out in my book, you should see enough warning signs to ensure your money remains safely in your pocket, nevertheless though, you have to keep this is the back of your mind.
The Franchisor should have a good business that will reap greater benefits through expansion. Their attitude should come across as being interested in the business and how it operates rather than the Franchise element per se. The Franchise ideally can be summarized as a means to an end, rather than an end in itself. No greater indication of this approach is in the level of the Franchise fee that you normally have to pay for the Franchise. While the franchisor will expect a fee, that fee shouldn't be disproportionate to the other investments you will have to make.
In a capital intensive Franchise you will need to invest substantially in setting up the business and the initial running costs. Let's face it every pound you have to invest in buying the Franchise is a pound less available for the business itself. Even in those franchises where there is not such a large element of investment in plant and machinery, the Franchisor should regard your business as a long term prospect. After all if you are handing over a significant proportion of your Sales revenue each month to the Franchisor they are going to benefit greatly in the longer term. Why would they feel the need to take a huge initial fee from you? Could it be that they don't regard the future income stream as certain enough?
Some Franchisors argue that they need evidence that you have adequate capital behind you, in order that you can sustain yourself in the initial phase. The initial payment is therefore a type of capital adequacy hurdle that has to be overcome. Hopefully the gaping hole in this argument is clear! Leaving on one side the less arduous alternative of just getting the prospective franchisee to prove their net worth, it cannot help a new Franchise if the initial capital available to put into the business has to be depleted in this way.
Quite frequently the initial fee is split into various elements and therefore can appear more acceptable. For example the purchase of initial stock and a charge for Training seems much more acceptable. Just be aware that the charges are all distinguished by one element. Despite the change of description, the destination for the cheque you write does not vary! However you should be able to get a detailed breakdown of the services and goods being purchased in advance with your money. Just make sure that the pricing is realistic and the process is not just window-dressing.