By Eric Parker

Assume you are tired of working for a Corporate Company and want to start your own business.

You have three options:

  1. Start a business from scratch.
  2. Purchase an existing business.
  3. Purchase/start a franchise as a franchisee.

For the purpose of this article we will concentrate on option 3, selecting to become a franchisee and indicating how it differs from a “normal” business.

A franchise is a ‘normal’ business but you are buying a licence to run a tried and tested, proven concept and because of that you must follow rules and pay fees for the privilege of the use of the brand name and business formula.

So, what are the advantages and disadvantages?

Advantages

  • You are buying into a proven concept with a well-established brand name so you limit your risk substantially.
  • You receive a full business format including an Operations and Procedures Manual and proven systems and controls.
  • You will be well trained in all aspects of the business both initially and on an ongoing basis.
  • You will receive procurement benefits i.e. the purchase of goods at favourable terms and conditions.
  • You will be part of group marketing and advice on how to market your business locally.
  • You will be mentored by the franchisor and can request help when required.
  • Your financial results will be monitored and benchmarked against other franchisees
  • You will be able to sell the business at a premium due to the franchise having an established brand name.
  • You will be assisted with site selection and construction costs and planning.
  • Staff recruitment will be easier because good staff prefer to work for an established brand.
  • The franchisor will ensure you are strategically up to date and develop new products/services as the market changes and develops.
  • The failure rate of a good franchise is substantially lower than starting a business from scratch.

Disadvantages

  • You will have to run your business in line with the rules and regulations imposed by the franchisor.  You cannot make changes as you please, however, procedures should be in place for you to suggest improvements.
  • You will have to pay fees for the benefit of being part of the brand.  Fees will include an initial upfront fee, a monthly royalty/management service fee as well as a marketing contribution.
  • You will need to sign an onerous Franchise Agreement.
  • You do not own the brand name and only have the rights to use it in a well-defined area and for the duration of the agreement.
  • If you want to sell your business you will have to give the franchisor the first right of refusal to purchase it and if he turns it down the franchisor must approve the new owner as a suitable franchisee.
  • The franchise agreement has a termination date (normally after five years) and then there will be renewal terms i.e. the business must be updated and remodelled.

The best way to define your role as a franchisee is: “You are in business for yourself but not yourself”

Caution!

This article comes with a big caution!

Not all franchisors are equal. Not all franchisees are profitable.  There are some unethical franchisors around trying to hard sell untested franchises to make a quick buck.

Be ultra-careful before you commit to a franchise and do thorough research in a way we have covered in other articles.