Franchise Basics If buying an existing business doesnt sound right for you, but starting from scratch sounds a bit intimidating, you could be suited for franchise ownership. What is a franchise--and how do you know if youre right for one? Essentially, a franchisee pays an initial fee and ongoing royalties to a franchisor. In return, the franchisee gains the use of a trademark, ongoing support from the franchisor, and the right to use the franchisors system of doing business and sell its products or services. In addition to a well-known brand name, buying a franchise offers many other advantages that arent available to the entrepreneur starting a business from scratch. Perhaps the most significant is that you get a proven system of operation and training in how to use it. New franchisees can avoid a lot of the mistakes start-up entrepreneurs typically make because the franchisor has already perfected daily operations through trial and error. Reputable franchisors conduct market research before selling a new outlet, so youll feel greater confidence that there is a demand for the product or service. Failing to do adequate market research is one of the biggest mistakes independent entrepreneurs typically make; as a franchisee, its done for you. The franchisor also provides you a clear picture of the competition and how to differentiate yourself from them. Finally, franchisees enjoy the benefit of strength in numbers. Youll gain from economics of scale in buying materials, supplies and services, such as advertising, as well as in negotiating for locations and lease terms. By comparison, independent operators have to negotiate on their own, usually getting less favorable terms. Some suppliers wont deal with new businesses or will reject your business because your account isnt big enough. Franchise or Business Opportunity? Business opportunities are less structured than franchises, so the definition of what constitutes a business opportunity isnt easy to pin down. In essence, a business opportunity is any package of goods or services that enables the purchaser to begin a business and in which the seller represents that it will provide a marketing or sales plan, that a market exists for the product or service, and that the venture will be profitable. Here are other key factors: A business opportunity doesnt generally feature the sellers trademark; buyers operate under his or her own name. Business opportunities tend to be less expensive than franchises and generally dont charge ongoing royalty fees. Business opportunities allow buyers to proceed with no restrictions as to geographic market and operations. Most business opportunity ventures have no continuing supportive relationship between the seller and the buyer; after the initial package is sold, buyers are on their own. Find more information on the differences between franchises, business opportunities, MLM programs and licensing agreements in the following articles: Choosing the Best Business to Buy Different Worlds Franchisees And Licensees--Whats the Difference? The Pros The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many: brand awareness, uniformity in meeting customer expectations, the power of pooled advertising and the efficiencies of group purchasing. For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business program has already proved to be successful in the marketplace; the use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognize; and the advantages of group advertising and purchasing make operations more profitable. In addition, ongoing training creates an instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally. Operating a successful franchise may quickly lead to building a second and then a third business, and so on. Fortunes have been built this way. The Benefits Reduction of risk Turnkey operation Standardized products and systems Standardized financial and accounting systems Collective buying power Supervision and consulting readily available National and local advertising programs Point-of-sale advertising Uniform packaging Ongoing research and development Financial assistance Site selection guidance Operations manual provided Sales and marketing assistance The Cons Franchising, however, is not for everyone. Fiercely independent entrepreneurial types (you know who you are) may chafe under the strict operational requirements and specifications of a franchised business. If things have to be done your way, you may want to head in another direction. Also know that some franchise systems are better than others. A weak franchise program will not train you well to handle the challenges of the business, will not do a good job of assisting you when problems arise, and will not make the best use of your advertising dollars. The Downside Loss of control A binding contract The franchisors problems are also your problems If youre considering buying a franchise, dont let wild expectations influence your decision. While franchising is designed to put people into business who have never owned a business before, the excitement of ownership can create an impulse to move forward without proper planning. If you rush headlong into buying a franchise expecting to boost your current working salary, but the earnings dont allow you to pull out more than half your former salary, you will be one unhappy camper. Work with a good CPA to prepare a cash-flow projection for the business before you take the plunge. Know how long it will take to break even and turn a profit, as well as the amount of salary youll realistically be able to pay yourself. Associated Costs In terms of capital investment, your franchise fee will be determined by the profitability of the business. Most companies have a scale when it comes to franchise fees. They can have varying ranges, anywhere from $2,000 to $100,000+, depending on the size of the system. In addition to this front-end franchise fee--the one-time charge that a franchisor assesses you for the privilege of using the business concept, attending their training program, and learning the entire business-there will also be an ongoing royalty fee, typically ranging from 2 to 10 percent, or a monthly figure. Some of the other costs associated with a franchise include: Facility/Location In some cases, you may also have to buy land or a building, or you may have to rent a building. If you rent a building, youll be responsible for not only the monthly lease but for the one-time security deposit as well. In addition, youll have to pay for leasehold improvements. In some cases, the owner of the building will put these in and factor them into your rental, probably charging you a small additional fee. The franchisor might provide you with an allowance for leasehold improvements that runs in the neighborhood of $10,000 to $35,000 for your average franchise. Most franchisors will tell you what their estimated leasehold improvements will be. Equipment Different types of businesses will need various pieces of equipment. There are generally long-term payments available for most equipment purchases. Fortunately, most banks will provide loans for equipment because it also serves as collateral. Signs Outside signage can be very expensive for the small-business owner. Most franchisors have developed a sign package that the franchisee is obligated to purchase. Opening Inventory This will usually consist of at least a two-week supply, unless youre in a business that requires a much more complicated inventory. Most franchisors will tell you what their opening inventory requirements are. Working Capital For rent, you may be required to deposit first and last months payments as well as a security fee. Youll also have to pay a deposit to the electric, gas and telephone companies (who will want deposits prior to giving you service). Youll need some working capital and money in the cash drawer to make change. Youll need money to pay your employees. Youll need money just to operate until theres a cash flow. If youre buying a franchise that relies on charge accounts, youre going to have to allow yourself some additional capital before the bills are paid by the customers and returned to you. Advertising Fees There is usually a fee for advertising on a regional or national basis. Most larger franchisors require their franchisees to pay a certain amount into a national fund used to advance the concept. The upside is the benefits are quite substantial in terms of the visibility you get with the type of advertising that most franchisors do. entrepreneur/article/36328
Posted on: Thu, 06 Nov 2014 20:30:56 +0000
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