The Challenges and Pitfalls of Franchising
We are all aware from the term “franchising”, and the majority of us know people involved with it. In the end, it now contributes greater than 10 billion towards the United kingdom economy, across numerous business sectors. But what exactly is it really about, and just how are a few companies so effective in internet marketing, although for other people it brings disaster? In the following paragraphs we are searching at:
The fundamentals – exactly what is a franchise, and just how will it operate?
What must you determine if you are looking at purchasing a franchise?
What in the event you determine that you are looking at working on your business through franchising?
The fundamentals of franchising
The idea is rather simple. Inside a franchise, a recognised business (“the franchisor”) grants someone (“the franchisee”) the authority to trade underneath the franchisor’s trade mark or trade name.
Most franchising is really “business format” franchising. Which means that the franchisor develops a company concept, together with a trade name and operating methods, plus they train the franchisee in how you can run their business by using this concept. The franchisee operates his/her very own business underneath the franchisor’s name and under some fairly tight controls and guidance. They are put down inside a franchise agreement, in most cases an operations manual too.
In mind, a franchise agreement is basically a trade mark licence, with numerous operational instructions and controls put on the franchisee.
Oftentimes, the franchisee is offered an “exclusive” territory to operate throughout the term from the franchise agreement.
In return for the authority to make use of the trade name and operating methods, the franchisee normally pays the franchisor:
An up-front fee (usually 5k upwards)
Ongoing payments (known as “royalties” or “management service charges”) that are usually compensated monthly, and they are whether fixed number of product sales (generally 5 – 11%), or else a collection monthly figure.
The franchisee may also be needed to create contributions to some central marketing fund run by the franchisor.
Additionally, the franchisee might have to pay to get premises, stock, equipment etc.
For franchisors, franchising can therefore be an extremely quick path to business growth, with low overheads and occasional risk. We’ll see this in greater detail afterwards in the following paragraphs. For franchisees, franchising can offer a beautiful chance to buy and operate their very own business, only one with a proven business concept and which supplies training and support. Franchising can in some instances offer a really rare chance for genuine work/existence balance.
What you ought to determine if you are looking at purchasing a franchise
Sadly however, just like all things in existence, it’s not always that easy. Although survival rates for franchisee companies tend to be greater compared to other business start-ups, franchisees very frequently fail. Some lose substantial levels of money, frequently through no-fault that belongs to them.
Below are the challenges to prevent:
Peril No. 1 – Not doing enough “homework” before paying your money
Most franchisors can “talk a great talk”. It’s their job to convince you their franchise offering will take you wealth and success. However, although many franchisors are scrupulously honest and professional within their dealings with prospective franchisees, a number of them are regrettably not.
Remember – whenever you undertake a franchise this can be a “b2b” agreement. There’s no consumer law to safeguard you, so that your legal remedies could be very limited. It’s your responsibility to look at what you’re being told, rather than to consider promises and forecasts on face value.
Its smart to keep in mind age-saying: “Whether it sounds too good to be real, it most likely is”… !
Things to look at prior to signing up:
Perform the figures within the franchisor’s projections really accumulate? Consider asking an accountant to look into the forecasted figures to find out if they’re realistic. Ask other franchisees. Perform the figures allow a appropriate margin for error? For instance, it ought to be possible that you should fall just a little lacking conservative projections but still earn profits that you could survive.
Take a look at market. Can there be already an established customer interest in your productsOrsupport? Does your territory possess the right census (disposable incomes, buying trends etc)? May be the market already over-saturated with competing choices?
Get inside information using their company franchisees (and become cautious about franchisors who don’t would like you to speak with their other franchisees).
How lengthy has your franchisor been established? Do they have an established track record of success? If they’re a brand new business, this isn’t always evidence of disaster ahead. When you are realistic, you’re taking on a lot more risk with a brand new business than you’re having a well-established one.
If you’re a person in a networking group, consider discussing the company chance along with other people, to have their ideas and feedback. They could give you a far more objective view than close buddies or family people.
Explore-line for comments or details about your franchisor. Exist plenty of happy customers available, or loads of complaints?
May be the franchisor part of the British Franchise Association? Keep in mind that not every franchise systems are always well considered or well tested. Membership from the British Franchise Association – requiring the signing of the charter for ethical franchising – is a great indicator of the chance worth consideration, although there’s no replacement for correctly looking at and researching a franchise.
Peril No. 2 – Dealing with a franchise which doesn’t play for your personal strengths
You have to think lengthy and difficult about whether dealing with a franchise will fit your personality and skills. You might imagine, for instance, throughout a frustrating day in the office, that nothing could be lovelier than departing the rat-race and running your personal coffee shop. But watch out for the “grass is greener within the fence” philosophy. Regardless of what franchise you are taking on, chances are it will involve effort, and will also not be satisfying unless of course it’s something you are enthusiastic about.
The important thing traits that franchisors are searching for within their franchisees include:
Enthusiasm for his or her industry. Are you a great ambassador for his or her brand?
Readiness to function in the franchisor’s operating-system. (Quite simply, franchising won’t meet your needs exactly if you’re a free-sprited entrepreneur who would like to do their very own factor.)
Motivation along with a strong work-ethic.
Oftentimes, financial literacy and management techniques.
Peril No. 3 – Missing an chance to barter
For many franchisors, franchisee recruitment is the single greatest challenge. Competition among franchisors to locate franchisees is frequently fierce. Many of the so in early stages of the franchise offering. If you’re one from the franchisor’s first 5 prospective franchisees, you might have more scope to barter on charges than you believe. Some franchisors won’t ever negotiate, but others will, so it’s worth trying it out.
Peril No. 4 – Not implementing advice
It’s tempting in order to save costs by not receiving legal counsel. Regrettably, this could grow to be an incorrect economy. Most BFA affiliated lawyers will review and advise for your suggested franchise deal for an agreed fixed fee. Although many franchisors won’t negotiate within the relation to their franchise agreement, a BFA affiliated lawyer will have the ability (i) to show you just what the implications of the franchise agreement are suitable for you and also (ii) to warn you contrary inside your agreement is non-standard, or unworkable.
When you purchase a franchise, you’re taking on some significant commitments and liabilities, which usually include obligations and limitations which continue after your franchise involves an finish. Talking to a specialist lawyer provides you with reassurance.
Baby if you are looking at working on your business through franchising
The range of companies active in the franchise market is astounding. As the most apparent examples are high street shops variety, for example fashion stores, junk food restaurants and print/copy centres, you will find a large number of service concepts offering franchises too, for example business coaches, automotive aftercare providers, networking organisations, children’s activities, snack machine distributors and travel agencies.
An growing quantity of new companies plan their development right from the start by having an eye to the opportunity of franchising within the lengthy term. So frequently its smart to consider advice in an initial phase.
Franchising could be a very attractive route for growth for a lot of companies. It features a quantity of features in the favour:
Franchising frequently enables companies to rapidly set up a national presence inside a couple of years, achieving an interest rate of network growth which may be impossible through company funded development.
The sources you will have to lead towards the opening of the franchised outlet are far under should you be opening a business-owned store – the franchisee will fund assets like the premises lease and fit-out, recruits and trains employees and implements the neighborhood advertising campaign. This allows you to create a compact management base centered on assisting multiple franchisees to produce their business concurrently, instead of methodically opening branch after branch, and sourcing new startup capital for every.
If you take the franchise route you are able to cut overheads. Should you choose it right, then you’ve less staffing and administration issues, and may focus additional time on developing the company. By accelerating expansion, your company network achieves greater economies of scale earlier, more powerful brand awareness, is a lot sooner in a position to challenge for national contracts and, within the situation of the fledgling market, is within a far greater position to capture early market leadership and set up a dominant position over its competitors.
Because the capital outlay is usually lower, your company risks are frequently reduced.
Franchising can facilitate growth overseas that might well be impossible, specifically if you recruit franchisees in local markets who’ve contacts and market understanding that you might not have access to.
But franchising doesn’t suit watch, and a few companies come unstuck by jumping into franchising too rapidly. Here are a few working types of how things will go wrong:
Peril No. 1 – Being too rash to produce
For the greatest for the business, you must have a watch towards the lengthy-term. Franchising may well be a great route for future growth, however might not yet be the greatest time for you to attempt it. Basically, whenever you launch into franchising, you’re selling a brandname along with a business concept. Like a rough guideline, the more your company continues to be operating, the greater value you build, and also the greater the cost the franchisor can request a franchise.
Issues to think about are:
Business proprietors mostly are drawn to franchising since it offers use of a recognised business design that has been correctly proven and tested through the franchisor. For those travelling towards the franchise market having a business concept that has not chalked up annually of operations and acceptable financial performance, you might well find it hard to compete against other franchisors on franchisee recruitment.
Should you launch before you decide to have enough time to test out your operating methods, there’s a danger that the franchisees will encounter trouble and appear for you to get the pieces. And you will be as “at ocean” because they are on how to fix things.
Have you ever registered your trade mark coupled with proper assistance with protecting your ip? It’s never a good idea to attempt franchising before you have carried out this. As the network actually reaches national status, building brand credibility and positive customer goodwill, the significance of your brand protection will grow as local competitors challenge your franchisees.
Peril No.2 – recruiting “anything having a pulse”, or “anybody having a cheque-book”
For many franchisors, finding and recruiting franchisees is the single greatest challenge. There are many more franchise choices in the marketplace than you will find prospective franchisees who wish to purchase them. Which means that levels of competition are strong and franchisees are able to afford to select. While you might begin with fine intentions about only dealing with those who are right, there’s an unavoidable pressure to obtain recruits in so you start earning charges. Even one badly performing franchisee can absorb a hugely disproportionate quantity of management time, and numerous badly performing franchisees can harm your logo and even take the business to the knees.
Peril No. 3 – Not receiving the best advice
Lawyers and consultants who’re associated with the British Franchise Association are experts within the franchise industry, as well as their BFA membership means that they’re needed to function inside a framework of ethical standards. If you’re considering creating a franchise business, it’s a good investment to speak to pros who you can rely on.
However, its smart to look around. Some advisors have better good value than the others. Some advisors will tie you in a deal in which you pay one big lump sum payment for various services. Others will tailor-make their professional services for you personally, so you only spend the money for services that you simply really need or want. Which is on top of that if you’re able to talk to somebody that can assist you to evaluate franchising against other potential routes to growth. In some instances, for instance, a licensing or agency arrangement may fit your business far better. Therefore if your advisor doesn’t have knowledge of these fields, it could seem sensible to locate another person.