The Positive and Negative Aspects of a Franchising Business
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Nine out of ten franchise owners reported profits in 2002. Experts state that 40 cents of every retail or service dollar spent by consumers is spent in a franchised business. In 2000, most analysts estimated that franchising companies and their franchisees accounted for $1 trillion in annual U.S. retail sales, with approximately one out of every 12 U.S. retail business establishments being a franchised business.
This article looks at the type of business that makes a franchise and what franchising is all about. It discusses a variety of pros and cons of franchising. Some of the pros include established brand, a loyal customer base, financial assistance, less risk than other forms of start up businesses and business support. Some of the cons include initial payouts and royalty fees.
If you wish to start your own business, one option to consider is the franchise business model. In this case, you are getting involved with a business that is already established, and the risk of failure is not as great as with other types of business models.
What is a Franchise?
A franchise is defined as “a legal and commercial relationship between the owner of a trademark, service mark, brand name, or advertising symbol (the franchisor) wishing to use that identification in a business.” A franchisee will sell goods and/or services that come directly from the franchise and meet a certain standard.
What to Look For
If franchising appeals to you, then your first course of action is to do plenty of research on the subject. Figure out the financial side of things first. Ask yourself how much money are you able to invest in your franchise to start. The initial fees for start up can start as low as $1,000 and can reach as high as $200,000. There are other costs associated with start up to think about, as well including equipment and real estate.
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The average investment to start a franchise is $250,000, not including real estate, but plenty of opportunities cost even less. The average royalty fees paid by franchisees to the franchisor range from three to six percent of monthly gross sales. The average length of a franchise contract is 10 years. Source: Quintessential Careers (http://quintcareers.com) |
The next thing you need to decide is what kind of franchise you would like to get involved in. Once you have decided upon the opportunity that is right for you, you need to interview franchisees to find out about potential earnings, costs, support, etc.
Ask all of the questions you need to. Is the person happy with their choice of franchise? Do their earnings live up to their expectations? How much training, consulting and marketing does the franchisor offer to the franchisee? Knowing all of these things is the key to making the decision that is right for you.
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Top 10 Franchises According to the annual review of the franchise industry by Entrepreneur.com, here are the top 10 franchises: -Subway (sandwiches, salads) Source: Franchise 500 |
Pros of Franchising
There are plenty of pros to this business model:
Established Brand, as well as Customer Base
When you start out you already have a franchise that is established and does not have to be built from the ground up. You also have a loyal customer base, which is always a plus.
Marketing Support
Marketing material is in place to help you grow your business, such as regional and national campaigns, and in many cases, local campaigns as well.
Reputable, Reliable Suppliers
You do not have to start from scratch with unknown suppliers. Franchisors generally have established relationships with suppliers that are built on trust and reliability.
Business Support
You have business support from the beginning. There is a saying in the franchise business that conveys this truth best: “You’re in business for yourself, but not by yourself.”
Training
Most franchise businesses offer technical training as well as management training.
Financial Assistance
In many cases, it is possible to obtain a loan or another form of financial assistance from a franchisor to get you started.
Access to Methods Related to Being a Proprietor
Trade secrets and business secrets are part and parcel of the franchise operation.
You are Your Own Boss
Starting your own business means becoming your own boss. This is as true of starting a franchise as every other type of business.
Decreased Amount of Risk
You risk less in terms of money, time and commitment to open a franchise because it is, as previously mentioned, already established and well known.
Cons of Franchising
To provide an accurate picture of the franchise business, you must also be aware of its negative side:
Initial Payout
Some of the larger franchises charge a high franchise fee and start up costs that can equal more than it would have cost you to start another type of business.
Royalty Payments
Franchisees are expected to pay a percentage of the money they gross on a monthly basis back to the franchisor. This will lower the amount of profits you get to keep.
Advertising and Marketing Fees
Marketing support from a franchisor does not come for free. You will have to pay fees related to the help you get in these areas.
Limited Amount of Creativity
If you like to inject your own ideas into the business you run, you may find a franchise is too rigid and constraining for you. A franchise contract contains very explicit standards about how it is to be operated and rules must be followed to the letter. There is little room for the creative freedom of the franchisee.
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Disclaimer: Ideawala.com does not recommend or endorse the products or services mentioned by the authors. We have not verified authors' credentials. We do not guarantee the accuracy of the information in the article or the earnings claims. Nothing in this article should be construed as business, legal or tax advice. Please consult a professional business advisor, an attorney or an account for specific advice in your situation.
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