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Do You Really Want a Franchise?

By: Kevin Watson MSc - Updated: 27 Dec 2012 | comments*Discuss
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The attraction of franchises is that they are ready-made business concepts. In other words, entrepreneurs can become part of commercial ideas that have proven worth.

Entrepreneurs should still proceed with care, however. Franchises are business ventures like any other, and time spent investigating the opportunities they offer is well spent.

Main Pros and Cons of Franchises

The most significant advantage of a franchise company is its chances of commercial success. A business franchise with a recognised brand, an established customer base, and the offer of exclusive rights is less likely to fail than a business that’s entirely new.

The main disadvantage, from an entrepreneur’s point of view, are the terms and conditions accompanying a franchise agreement. These may include higher than anticipated costs, and changes over which an entrepreneur has no control. Entrepreneurs with business ideas of their own may also find it frustrating to have no choice but put them to one side.

Franchise Arrangements

Franchising covers a number of business arrangements. The most popular is the business format franchise whereby an entrepreneur obtains a licence to use a business concept in a certain location. The franchiser supplies the product or service and such features as trade marks and names. For this, the franchisee usually pays a one-off amount to the franchiser, and regular royalty fees from the sales revenue.

Other arrangements include dealerships, distributorships, agencies, and licences to manufacture. Entrepreneurs who choose one of these arrangements have greater control and business freedom than with a format franchise.

There is one further type of business franchise that in effect is a multi level marketing scheme. This involves recruiting distributors, selling products for a manufacturer through the distribution network, and receiving commission on the sales. Entrepreneurs need to bear in mind that the government regards some - but not all - multi level marketing schemes as illegal.

The Likely Costs

The costs of a franchise break down into two parts: initial and continuing.

Initial costs include:

  • A start-up fee.
  • Premises.
  • Stock.
  • Equipment.
  • Setting up a business structure (sole trader, partnership, or limited company).

Among the continuing costs are:

  • Royalty fee payments to the franchiser.
  • Stock replacements.
  • Staff.
  • Training.
  • Rent/commercial mortgage.
  • Utilities.
  • Maintenance of premises.
  • Advertising.

Before Making a Commitment

Before making a financial commitment, it’s vital to have a clear idea of the above costs. An entrepreneur should also conduct research to assess the potential of the business.

For example, if entrepreneurs have any enquiries, they should ask franchisers for clarification. In particular, they should insist on evidence to support any claims about sales and future prospects.

One enquiry worth pursuing is to ask for details of existing franchisees. When these are available, the next step is to arrange visits to the franchisees at their places of work. Entrepreneurs can then obtain first-hand details of the successes and problems of each company.

Another essential piece of research is to determine the level of competition. Similar businesses in the same location may already have the lion’s share of the available market.

Franchise Agreements

A franchiser will ask for a signature on a franchise agreement. As with any business venture, the first thing to do before putting pen to paper is have a solicitor check out the legal implications of each clause.

Entrepreneurs must ensure they are comfortable with the length a franchise agreement lasts; the terms of renewal; the details of all the fees; the level of support from the franchiser; the options for selling the business; and the geographical limitations of sales and marketing.

Business in a Box

A franchise isn’t a straightforward “business in a box”. There will always be a lot of hard work in establishing and running any sort of company. Nonetheless, such a business can provide what many entrepreneurs hope to achieve.

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