What you should consider when investing in a franchise business
Before you consider investing in a franchise business you should understand the concept of franchising and you should understand the brand that you are considering investing in and the people behind it.
In simple terms franchising is just a method of doing business, a method of marketing products and services which is now being used across an ever growing variety of industries and businesses.
Although most people credit the invention of franchising to American commerce the word “franchise” is derived from the French word “franchir”, which means “to be free – exempt from servitude” which is appropriate because franchising offers you the freedom to own and operate your own business. In any event franchising in this millennium has no nationality, religion, race, colour or creed and the application of the franchise business model has been adopted worldwide.
In a franchise business relationship the brand owner is the franchisor and the party that owns the right to the tradename, trademarks and intellectual property of the business and you as the franchisee are the party that is granted the right to use the trademarks and intellectual property of business for a predetermined period of time and in a predetermined location or geographical area.
In its ideal state, a franchise is the “marriage” of an entrepreneurial company with a proven business system and a hard-working, local independent business owner willing to follow that proven system. The “marriage” is a contractual relationship spelled out in a written franchise agreement which details the rights and obligations of both parties.
There are various types of franchise agreements depending on the brand, the nature of the franchise arrangement and the development and geographical scope of the arrangement. The most common types of franchise agreements are the single unit/business franchise agreement, a multi- unit/business franchise agreement typically called an area developer agreement and a multi- unit/business franchise agreement that allows for 2 tiers of franchising typically called a master franchise agreement.
When looking at the most successful franchise brands you can see that most share common traits and characteristic and most of them have identified, invested in and maintain the following:
- Excellent franchisees
- An experienced, energetic & focused management team
- Effective manuals and “operating” tools
- Effective training programs
- Strong leadership
- Outstanding franchisor/franchisee relationships
- A sound business and financial plan
- A customer (guest) focused attitude
When you consider investing in a franchise business keep in mind that franchising is a growth strategy and not a survival strategy. If you determine that the brand you are talking to needs to franchise just to stay afloat you should look elsewhere for franchise opportunities as the brand needs to re-examine its competitiveness and the fundamentals of its business. Some key reasons for brands to use a franchise developmentmodel include:
- Accelerating their expansion and market penetration
- Minimizing their contingent liabilities
- Minimizing their management procurement challenges
- Reducing the daily challenges of direct management
- Generating income based on store openings and recurring income from gross sales
- Reaching target consumers more effectively
- Improving efficiencies and economies of scale
- Generating supplemental income from products and services
- Capitalizing on advertising pooling potential
You should also carefully consider these 10 essential issues when you evaluate a franchise business:
- The brands vision, mission and values and its reputation and public image
- The long term commitment of the brands shareholders
- The capability and experienced of the brands management team
- The uniqueness of the brands products and services and if it has broad appeal
- The overall competitiveness of the brand
- The financial track record of the brand
- The anticipated break-even point & return on your investment
- The ease of transferring and replicating the concept
- The ability to maintain and deliver consistent standards to your customers
- The completeness and adequacy of the “SYSTEM” (Manuals, Processes & Tools)
- The quality and adequacy of the training program
Beyond these 10 essential considerations detailed above you should also ensure that you understand the business and how it operates in terms of the outlet prototypes, the brands key competition, the target market and consumer profiles, the brands marketing strategies, your investment cost and anticipated return and the fees you will be required to pay to the brand owner.
Before you make a final decision about the brand you should also make sure that the brand is going to provide you with an operations manual, training & ongoing guidance support, details of site selection criteria, standard pans & specifications, initial & ongoing advertising & promotional support, a list of and access to the required products, strong identity & brand usage guidelines, and access to continued improvements and enhancements in the system.
While understanding the brand you are considering investing in is obviously very important it is even more important to know and understand yourself and you should ask and answer the following questions:
- Are you serious about running your own business
- Are you willing to work hard 24-7-365
- Are you willing to do the dirty work
- Are you going to enjoy owning and operating the franchise business
- Are you willing to follow the franchise System
- Are you successful in dealing with people
- Can you afford the investment
- Do you understand your contractual obligations
- Do you have spouse and family support
- Do you have a positive outlook and a strong desire to succeed
- Do you want to make money and achieve financial independence
If you do ultimately invest in a franchise you will become part of a family and together with the franchisor you will need to constantly work on the following:
- Enhancing the real and perceived value of the brand in the minds of current customers and the community.
- Getting and keeping more and more customers by marketing the brand and consistently following the proven operating system.
- Becoming more efficient, effective and profitable
- Developing people who are committed to serving customers
Franchising is a proven business model and the pros of investing in a great franchise brand far outweigh the cons.
Additionally investing in a franchise business generally presents much less of a risk than trying to create your own business from scratch.
Hopefully the advice in this article will help you when you are evaluating franchise opportunities and considering an investment in a franchise business and I will leave you with a bit of ancient wisdom which is somewhat more time tested than the advice that I have given you herein:
“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win” Sun Tzu