Buying A Franchise

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Yellow Belt
What does franchising mean?

The term "franchising" can describe some very different business arrangements. It is important to understand exactly what you're being offered. Franchising is by no means a new concept. Certain forms of franchising dates back to around the 1850s when brands which have now become household names first started up.

Business format franchise

The type we most know of in franchising is a business format. This is normally when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea - often in a specific geographical area.

The franchisor's has products or services, which then are sold by the franchisee under the franchisor's trade mark or trade name. The franchisee has all the franchisor's help and support.

What does the franchisor get out of this arrangement? The franchisee usually pays an initial fee to the franchisor and then an ongoing percentage of the sales revenue.

Although the franchisee owns the outlet they run, the franchisor controls how products are marketed and sold and how their business idea is used.

McDonald's, Dyno-Rod, and Prontaprint are among some of the better known franchises.

Not all franchises are of the business format type. For example:

* Distributorship and dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.
* Agency - you sell goods or services on behalf of the supplier.
* Licensee - you have a licence giving you the right to make and sell the licensor's product. There are usually no extra restrictions on how you run your business.

Some multi-level marketing businesses are franchises. Self-employed distributors sell goods on a manufacturer's behalf. A number of party plans run along these lines, for example. When you sell, you make commission. Sometimes you can even make more money by recruiting others who sell, because you make money on their sales too.

Positives and negatives of franchising

Whilst it's true that buying a franchise can be a quick way to set up your own business there are certain factors to consider.

Plus Points

* Your business is based on a proven idea. The franchisor might have been in business for many years, and the product or service is 'tried and tested.'
* You can use a recognised brand name and trade marks. The franchisor pays for advertising, often on TV or radio and in the newspapers, particularly if it's a large scale enterprise.
* It's in the interest of the franchisor to provide you with support - training, help setting up the business, and ongoing advice.
* You should normally expect to have exclusive rights in your territory. A similar franchise business won't open up 200 yards away from you for instance. Often it's more like a number of miles to reduce your competition.
* Banks look for 'safer' loans, and a franchise with a good reputation is often a good risk.
* Risk is reduced and is shared by the franchisor.
* You could be buying in to an existing customer base you will not have to invest time looking to set one up.
* Relationships with suppliers have already been established.

Minus Points

* You'll have the initial costs of buying the franchise. Also, you pay continuing royalties and you may have to agree to buy products from the franchisor.
* The franchise agreement usually includes restrictions on how you run the business.

The United States Office of Advocacy of the SBA indicates that a franchisee "is merely a temporary business investment where he may be one of several investors during the lifetime of the franchise. In other words, he is "renting or leasing" the opportunity, not "buying a business for the purpose of true ownership."

* The franchisor might go bust, or change the way they do things. You'd have little say if that happened, as such decisions are likely to be taken at corporate level, particularly with a large franchise business.
* An incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits.
* Other franchisees could give the brand a bad reputation.
* Unlike owning your own business, you may find it difficult to sell your franchise - you can only sell it to someone the franchisor approves of.
* By enjoying a reduced risk it could mean you might not generate large profits.

Is buying a franchise right for me?

You have to be honest with yourself. Do you have the right skills and attitude to run a successful franchise. Analysing your own personality can also help you decide which type of franchise would be right for you.

* Don't think that buying a franchise automatically gives you an ongoing customer base. A franchise gives you a business blueprint with a lot of potential - that's all.
* You are self-employed, so, do you have the necessary dedication and drive to work hard, and for possibly long hours?
* Do you react well to stress, or do you react badly to pressure?
* Do you tend to look at problems as a challenge, or an insurmountable obstacle?
* Would you be happy with the restrictions imposed by a franchise arrangement if it means you aren't 100% your own boss?

There are a number of well known franchises in the marketplace. Which one is right for you? Some of these points apply whether you are thinking of starting your own business, working for someone else, or buying a franchise.

* Do you like office work? Do you like working with food? Or would you prefer a business that involves physical labour or using a particular skill?
* Are you happy working on your own? Or, do you prefer a group of people around you?
* Not everyone likes dealing with members of the public. Would you prefer a franchise where you sell to business customers instead?
* Are you weak in particular business skills such as accounts? Can you find a franchise that offers the support you need in those areas?

How to finance the purchase

Avoid the pitfalls by careful planning prior to purchasing a franchise. It is worth thinking about the following:

* One you've done some self-appraisal, what kind of franchise, if any, will suit you.
* Find out what franchises are available and draw up a shortlist.
* Ask questions and talk to other franchisees of the business you are interested in.
* Never assume that because it is a franchise it must be financially sound. Research the performance figures. This should include of course an analysis of accounts for a period of three years.
* If you need a loan, check with your bank if it will consider a loan for the type of franchise you're considering.
* Do your own market research into the business and the competitors in your area.
* Draw up a business plan.
* Check the franchise agreement and get professional advice.

It would be foolhardy to-

* Jump into the first opportunity you see. Always check out other alternatives.
* Pay a non-refundable deposit.
* Commit yourself before you've taken all the necessary steps to ensure it's right for you.
* Assume a business which works well in another area must work in yours. Life isn't always like that.
* Take the franchisor's forecasts at face value.
* Put pen to paper by signing a contract without professional advice.
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