Franchising

What is a Franchise?

A franchise is a business agreement between a franchisor (company selling the franchise) and a franchisee (independent business owner buying the franchise). In the most common type of franchise agreement (business format franchise) the franchisor grants the franchisee the right to:

• Sell a product using the franchisor's brand (name, trademarks);
• Use the franchisor's operating methods (technology, systems and processes);
• Benefit from the franchisor's expertise in evaluating the market (market analysis, site selection, business planning);
• Receive ongoing support and training after start-up (access to substantial body of accumulated knowledge);

The franchisee (independent business owner) agrees to:

• Pay a franchise fee to the franchisor;
• Pay an ongoing royalty fee (% of sales);
• Operate the business according to the franchisors standards and procedures;

Franchising Industries Some of the largest and most recognized franchises are in the food industry but there are literally thousands of franchises operating in virtually every industry imaginable. Here are just a few of the industries in which franchised business models are available:

o Automotive

o Education

o Computer

o Direct Marketing

o Employment

o Financial Services

o Food

o Hair & Beauty

o Health & Fitness

o Laundry

o Hotel & Lodging

o Maid & Cleaning

o Maintenance

o Management

o Packing & Mailing

o Pet Care

o Print & Copy

o Real Estate

o Home Repair

o Retail Sales

o Senior Care

Advantages of Buying a Franchise

• A franchise provides an established brand with the benefits of enhanced customer awareness;
• Proven products and practices that increase your chances of success;
• Franchisees receive critical pre-opening guidance including market analysis, site selection, design, training and initial marketing. The franchisor also makes sure the franchisee is well capitalized (enough money to get through the start-up phase);
• Franchisee benefits from shared programs they could not duplicate on their own including ongoing training, best practices, national and regional advertising, operating procedures and field support, national call centers, bulk purchasing and discount programs;

• Franchisees are required to follow the system and have limited latitude to vary from the approved business model;
• Fees;
• You depend on the franchisors ability and willingness to meet its obligations;
• A poorly performing franchise system can negatively impact your business;

With those advantages and disadvantages in mind, why does someone elect to buy a franchise? At the end of the day, the reason an entrepreneur decides to buy a franchise as opposed to starting a business on their own is because they determine the franchised option reduces risk. Some of the top reasons new businesses fail are:

• Lack of planning (no market research, poor site selection, misappropriated resources, no business plan);
• Under-capitalized (lack of planning or unrealistic assumptions);
• Insufficient or ineffective systems (sales, marketing, operations, personnel etc.);

In sum, as a franchisee, you are buying the franchisers expertise in starting and operating the kind of business you are contemplating. The knowledge a franchiser offers can advance the franchisee down the learning curve past the point where most non-franchised businesses stumble and fall. Another important point to be made about starting a non-franchised business is that unless you have substantial industry experience in your target industry the business planning process can be something akin to looking into a "black hole". How do you answer questions about expected costs, anticipate market share and appropriate pricing? Without substantial experience the best you can do is an educated guess and if you guess wrong the consequences could be catastrophic.

With a franchised business you get to try the business on before you buy it. A good approach to research will allow you to get the answers to all of your questions before you buy. You can talk to franchisees who have gone before you and find out how much they earn and what they think of the business. You can spend a day at an operating store and see what it is like. Buying a franchise does not guarantee success but there is no excuse for not being fully informed.

Your decision about whether or not to buy a franchise will hinge on the conclusions you reach as to a particular franchisers ability to enhance your business success. In cases where the entrepreneur has expert knowledge or a new/unique market a franchise may not be the right choice. If you are looking for a proven business model that can bang out profits on a daily basis franchising is often the best choice.