Franchising

Franchising often grows during economic recessions when newly laid-off employees, early retired individuals and those impacted by corporate downsizing are looking for a means to expand their financial prospects.

After the economic downturn, many of the unemployed began looking at self-employment, including franchise opportunities.

If you are currently researching franchise opportunities, this article will provide you with a guide of what you must know before signing any franchise agreements.

Myth #1 - A Franchise Is Easier To Start Than Other Business Models

While most franchise opportunities provide you with everything you need to get started, no franchise is easy. Hard work and long hours are required, and there are many complicated factors that will determine the success or failure of your franchise.

"There' s a real--and pervasive--misunderstanding about franchising: that a franchise is a color-by-number system where you don't have to be a businessperson to be successful, that a franchise is infallible, and that if you start one, you're guaranteed success." says Mitchell York, author of "Franchise: Freedom or Fantasy?", an essential read for any would be franchisee.

For four decades, the International Franchise Association has insisted that franchises have a much higher success rate than independent small businesses. IFA surveys in the US suggest that 92% of franchise businesses are still operating after 5 years compared to an 80% national small business failure rate. However, there is ample evidence to discredit this assertion.

Take the US franchise research conducted by Timothy Bates, a Wayne State University Economist, which paints a very different picture. After 4 years, only 62% of franchised businesses had survived, while 68% of independent small businesses were still open for business. And independent businesses are far more profitable. Profitability was actually negative, on average, for franchised firms over the four-year period, which brings us to our second point...

Myth #2 - Franchises Are Profitable

Let's say, for example, you invest in a Taco Bell restaurant franchise. Operating only one unit, you'll likely net somewhere between $25,000 and $45,000 at the end of year one - not much money for someone accustomed to earning an executive level salary. The way to make real money with your Taco Bell is to own multiple units. Once you've taken your business to that level you really need to know what you're doing. Do you have the required skills to run a business of 5 to 10 units, hiring and managing the staff and creating the right role for yourself as the owner? These are not items that come standard with your franchise operator's manual!

One of my colleagues was a franchise failure. His initial investment was roughly $150,000. Over the first year or so he invested another $100,000. That's really not atypical. Then the economy collapsed, and so did his business. He ended up saddled with $250,000 in debt.

I always advise that, if you're going to buy a franchise, you really should have plenty of cash reserves. The up front investment to purchase is just the beginning of expenditures. Be patient. Profits will take much longer than you think. The reality is you have to endure losses and setbacks and keep going - don't let them stop you! Most small businesses close due to lack of cash flow -- usually just about the time they are on the brink of success.

Myth #3 - Franchises are a Low Risk Investment

Any savvy investor or entrepreneur knows that risk is always a part of the equation. But the risks of starting a franchise may be much higher than we are led to believe. Perhaps the most important question to ask is how much are you prepared to lose? Your massive investment may also equate to a massive risk.

A franchise can cost you anywhere from $10,000 to literally millions. In addition to the franchise fee you will need to budget for all aspects of set up such as stock, equipment, signage, furniture, fixtures, fittings etc. Your franchiser may also charge you for training and legal fees above your initial investment.

On top of the initial investment and set up fees you will have ongoing franchise fees. I'm unaware of any franchise that does not require ongoing monthly and/or annual fees. This is often masked under different terms, such as royalty payments on sales, advertising or admin fees just to name a few. Make sure you fully understand all your financial obligations, as it may take several years to recoup your significant investment and you should know exactly what you are in for. Make sure you do a detailed financial budget and allow for a contingency in case you aren't profiting as anticipated.

From there, you want to assess several variables to determine whether that investment capital is at risk.

1. What is your maximum financial exposure?

2. Is it a proven business model?

3. Are there risks associated with holding stock or staff contracts?

4. Is your home at risk as security?

5. What external factors can impact your cash flow? For example, is it seasonal? Is it dependent on the economy? Do you have a prime location?

6. What has been the experience of other investors?

7. Does the franchise have a proven track record? Many experts believe that franchise fraud is rampant.

Besides having a reserve of cash, you also need family support and a network of people, from role models to people whose opinion you value and have your best interests in mind.

Be in good physical health. Startups require stamina. You'll be working long hours and often on weekends, which leads to myth #4...

Myth #4 - As a Franchise Owner, You Set Your Own Hours

Yes, this is true. However, not in the sense you may be thinking. Most traditional franchises will require long hours (often 12-15 hour days) as well as the time that goes into managing a staff. Prepare yourself to put in long hours. Your experience and skill in training, supervising and managing staff will play a large role in determining how many hours you work. These types of factors are frequently overlooked with respect to time management. Poor interpersonal communication skills often create miscommunication and staffing problems, which often lead to undue stress and bad health.

Myth #5 - A Franchise is the Best Business Model for the Inexperienced Entrepreneur

On the surface it seems a traditional franchise would be a sound business model for the inexperienced entrepreneur. On the contrary, many franchisees come to realize that they have in reality purchased a very expensive JOB. Their inexperience does not serve them. They find themselves making less money with less freedom, working longer hours with much greater stress. Additionally, they must deal with their staff and may be legally committed to their franchise for an extended period of time without adequate get out clauses.

Inexperienced entrepreneurs would be better served by beginning their new enterprise with a lower risk business model. Online Business Models are more efficient and effective than the traditional brick and mortar model. Many of these types of businesses provide personal coaching and mentoring to succeed. Investment capital is typically a fraction of the cost of a traditional franchise yet provide significantly greater earning potential. The Online Business Model has numerous advantages over traditional brick and mortar franchises:

1. No Space
2. No Staff
3. No Rent
4. No Insurance
5. Low Investment Capital and Far higher Return On Your Investment - ROI
6. Greater Success Track Record for the Average Person/Inexperienced Entrepreneur
7. Quicker Profit Generation. (Profit within your first 90 days often in your first month or even your first week.)
8. Minimal Risk
9. Simplified Setup
10. Time Leverage
11. Can Be Run From Anywhere In The World

In Summary

Franchises and Brick's and Mortar, while still viable, are quietly and quickly being replaced by this simple, new online business model. A new breed of bright entrepreneurs are now finding that this new model is far more lucrative with far less headache and stress. Startup costs are a fraction of what it takes to start a traditional franchise. The Internet is expanding at a record pace, and with it, vast opportunity. By far the largest concern for most would-be Internet entrepreneurs is knowing who to trust or where to start. On the surface, it seems much safer to invest in a recognized brand such as McDonald's or Taco Bell. The reality is that there are a growing number of legitimate, high quality online business models that provide tremendous advantages over brick and mortar businesses. I recommend doing your due diligence on both franchises and online businesses and determine which one is right for you.