Assessing your Suitability for a Franchise Business
A franchise is an agreement or license negotiated between a company and an independent contractor that gives the contractor the rights to sell a product and the permission to use its trademark and business methods. The franchisee must pay the franchisor certain fees for this access. In return, the franchisor provides these rights such as paraphernalia, marketing, general support and structured format of operation, which the franchisee then uses to propel their business. There are two main types of franchising methods:
- Business Format: The franchisor supplies a variety of services to the franchisee including trademarks, logos, business research, development plans and operation style, products, training, marketing and interior layout design. In essence, the franchisor ensures that the franchise operates at its own quality and standards. In return, the franchisee pays an initial fee followed by royalties agreed upon by both parties. This format is most popular in the fast food, household supply, real estate and convenience store industry.
- Product Trade Name Format: This format does not feature payment of royalties to the franchisor. The franchisor supplies the franchisee with logos, trademarks, give away items, rack displays, vending machines and other marketing tools along with the product. The franchisee must first secure an account with the franchisor that allows them to get goods on credit and in bulk. Maintaining this credit line ensures a long and lasting relationship between both parties. The most common types of industries that utilize this type of format are manufacturers of soft drinks, cigarettes, petroleum and automotives.
Success as a franchisee will depend on various factors such as the ability to access capital, the hard work required and the proper planning before making a choice. Careful assessment of both the franchisor and self will prove pivotal in deciding what type and with whom to enter into a franchise.
Some key areas must be satisfied when conducting an analysis of the franchisor. Entrepreneurs need to know if the franchisor is financially sound, the style of operation as well as the history and ethics of their operation. They must clearly state the forms of training they offer along with clear guidelines to follow in case of any difficulties that may arise. Entrepreneurs also need to know the level of performance of other franchise outlets and the level of assistance given to them by the franchisor during the infrastructural and setting up phases. Any contract must state clearly the level of marketing assistance, paraphernalia and uniform assistance offered along with clear definitions of financial obligations including royalties, taxes, insurance, accounting and salaries. They must also state the level of flexibility allowed so that the franchisee can imprint their own uniqueness to the operation.
A successful franchise also requires great self-assessment. Half of all franchises fail due to the investor’s own plight. Investors must be frank with themselves before putting their hard-earned cash into a franchise. There are several questions to take into consideration before entering into any agreement. Some of these include:- How much do you understand about the concept of franchising and exactly what does it entail?
- Do you have the dedication of time and strength required to maintain a healthy and successful business?
- Will you be able to run the business long enough to recover their investment and make a profit?
- Do you have the leadership skills required to manage the business as well as to employ, lead and direct employees?
- Do you have the financial depth and support to sustain the losses during the developmental phases of the franchise?
- How much money is required for the investment and the risks involved?
- What is the main reason for going into the franchise? Is it job satisfaction, capital gain or to get rich?
- How challenging and stimulating it will be after a few years?
