Franchising – Benefits and
Limits
Franchising is a very exciting
way for a person to be an entrepreneur while having a very set structure of how
to operate the business and back office support from franchise’s parent company.
While franchising may allow people to own a business, there are several
drawbacks that you may face if you decide to buy into a franchise.
First, of course, the legal
disclaimer
Please note that the
information in this article is not to be used as consulting, accounting, or
legal advice. The following information is provided with the understanding that
this article is not a substitute for professional advice, and is merely for
informational purposes. BizPlanDB.com is not responsible for the use of
any information contained below or for the factual accuracy of any statements
made below.
The Article
Franchising is not a new
concept, and the roots of franchising can be traced back to the early 20th
century. If you were a kid that had a paper route, then you were briefly
introduced into the world of franchising. By buying into a franchise, you are
purchasing the right to use the business’s concept, operating plans, business
plan, logos, and marketing campaigns for your business. In exchange for this
right, you will have to pay an initial franchise fee (ranging from $2,500 to
$200,000 depending on the franchise), plus ongoing payments (or royalties) to
the franchising company. These royalties usually range from five to ten percent
depending on the reputation of the franchise and whether or not your royalty
payments include marketing support. If you are interested in purchasing a
franchise, you should ask the Company to provide you with an up to date copy of
their Uniform Franchise Offering Circular (or “UFOC”).
This is a legal document that
has been usually filed with the state’s securities or corporations department.
Each state has different rules regarding the information that must be contained
in the circular, and if you are uncertain of the language contained in the UFOC,
you should hire a lawyer to help you understand all of the legal jargon. In this
document, you will see all of the terms between you and a franchiser, including
expected startup costs, the initial franchise fee, the ongoing royalty payments,
and other requirements that may be required of you. Many franchises require that
a new franchisee attend a training seminar at their corporate headquarters (or
other location) before they can begin development of their franchise.
For entrepreneurs that do not
have much business experience, franchises can provide an easy entry into a new
market with minimal risk. Popular franchises enjoy wide brand recognition, and
can provide you and your family with a stable investment that will provide you
with years of income and financial security. Once you decide to leave the
business, you can sell your established franchise for a significant earnings
multiple.
Many franchisees buy into a
franchise agreement with the intent to develop a number of locations throughout
their regional area. This is an important fact for a potential entrepreneur
because franchiser companies cherish trained people that can develop markets
without having to shoulder very much capital risk. When you buy into a
franchise, you are accepting the substantial capital risk associated with
starting a business in a new market. This capital risk is alleviated through the
back office and marketing support provided by the franchising company.
Each franchising company
provides varying levels of support and marketing. This is also true for the
latitude granted to the entrepreneur for making business decisions. Each part of
your business has been carefully planned, including the method of operation,
approximately salaries to be paid, costs for materials or inventory, pricing of
products/services, royalty fees, and your ability to purchase or start
additional franchises. Franchisers often grant their franchisees a protected
territory, which protects you from having another franchisee start a business in
your territory. This is important because it provides with the assurance that
you will have exclusive access to your market with the brand name, logos, and
products offered through the franchise. Banks are very keen for lending to
entrepreneurs. This is primarily due to the fact the risks associated with well
known franchises are several reduced because the business concept has been
proven, other franchisees have developed profitable businesses using the
business models provided by the franchiser, and the brand name is well known
among consumers. Many lending institutions have several SBA and traditional
lending programs that are specifically geared to entrepreneurs.
In conclusion, franchising is
an excellent way to acquire or start a new business. The risks of franchising
are far lower than that of starting to own your own business. However, there are
many drawbacks as well, and it is important to remember that you will not have
100% control of your business. In a sense, you are becoming a manager of a store
that you happen to own. You will be required to follow many instructions and you
will be bound by an extensive contract that prohibits certain business
decisions, regardless of how good they may be. Banks and lenders are very happy
to lend to franchised businesses, and if you an entrepreneur with limited
experience, the world of franchising may be for you.