Buying a Franchise

Franchising provides a proven system and the support of a much larger organization and if you are a first-time business owner, the benefits of buying a franchise are numerous.

The old saying - the pioneer takes all the arrows - definitely applies to going into business for yourself.  Although it is very exciting to take on the world as an entrepreneur, it is equally comforting to know that you are not alone.  Franchises are proven business systems that have withstood the test of time.

As a franchisee, you are in business for yourself, but not by yourself.  The main reason people buy franchises – as opposed to starting a new non-franchise business, is to reduce risk while simultaneously maximizing the chance of success.

Some of the advantages of buying a franchise rather than starting an independent company include instant brand awareness and credibility, administrative and/or technical support, franchisor-provided training, quicker return on investment, b management, and a network of other franchisees and associations dedicated to supporting franchisees.

More and more companies are expanding nationally by selling franchises and to convince entrepreneurs to buy their franchise they are offering more competitive pricing, financing, and training then ever before.  Franchise companies have the money to promote their opportunity at a level most small business people cannot match.

As many first-time business owners find out, there is a high failure rate for independent, non-franchise businesses.  As an independent business owner you have to contend with franchise heavyweights that have a lot more resources for advertising and marketing, as well as ready-made brand recognition.

Starting out in a non-franchise business you may have little time and monetary resources for getting your name out there and you may be putting all of your energy into operations.  Who will drive the sales campaign?  Who will find, qualify and bring in the customers?  While there is more creative autonomy in an independent business, your chances are much higher as a franchisee of making it, particularly in cutthroat markets like food, hospitality and retail.

As a franchisee you typically have support every step of the way from people who have a vested interest in your success, as well as being well-informed about your particular business.  As part of a franchise system you can count on the efforts of your fellow franchisees to compliment your own marketing programs.  If a franchise in the next community or town sponsors an event, commercial or other promotion you will undoubtedly reap the benefits of those efforts.

If you enjoy your particular franchise the opportunity to open additional outlets are improved over an independent business owner looking to open another store.

No Guarantee for Success

No business method or industry sector can guarantee success, and franchising is no exception.  If the franchise involves a proven product or service with a well-recognised brand combined with hard-working, well-financed franchisees, the chances of success are very high.

If, on the other hand, the franchisor is under-funded, with an ill-conceived business idea that has not been tested properly and poorly recruited or trained franchisees, failure is likely.  Seek the right advice, ask the right questions, and ultimately make the right choice - remember, it is your investment that is at stake!

By purchasing a franchise, you can sell goods and services that have instant name recognition and can obtain training and ongoing support to help you succeed.  However, it's important to recognise that buying a franchise is not a magic formula that guarantees business success.  This will depend on many factors, including:

• The franchise concept and system.
• The management expertise of the franchisor, and
• Your own endeavors, initiative and commitment.

Franchising is a method of product or service distribution that is governed by a contract.  It is important for anyone deciding to start a business by becoming a franchisee to remember that in franchising a person is tied into a partnership arrangement for a defined period.

While buying a franchise may reduce your investment risk by enabling you to associate with an established company, it can be costly.  You may also be required to relinquish significant control over your business, while taking on contractual obligations with the franchisor.

The Cost

In exchange for obtaining the right to use the franchisor's name and its assistance, you may pay some or all of the following fees.

• Your initial franchise fee, which may be non-refundable, may cost several thousand to several hundred thousand dollars.  You may also incur significant costs to rent, build and equip an outlet and to purchase initial inventory.  Other costs include operating licenses and insurance.  You also may be required to pay a "grand opening" fee to the franchisor to promote your new outlet.
• You may have to pay the franchisor royalties based on a percentage of your weekly or monthly gross income.  You often must pay royalties even if your outlet has not earned significant income during that time.  In addition, royalties usually are paid for the right to use the franchisor's name.  Therefore, even if the franchisor fails to provide promised support services, you still may have to pay royalties for the duration of your franchise agreement.
• You may have to pay into an advertising fund.  Some portion of the advertising fees may go for national advertising or to attract new franchise owners, but not to target your particular outlet.

History

Franchising, as we know it today originated with the Singer Sewing Centre developed by Isaac Singer in 1858.  After he had invented the sewing machine, Singer encountered two problems when he took it to the market.  The first was that customers had to be taught how to use the new invention before they would buy it.  The second was that Singer did not have enough capital to manufacture his machine in large numbers.  He then came up with the idea of selling the rights to local business people to sell the sewing machine and train those who bought it.  Once he embarked on this route his enterprise expanded rapidly.  Fees earned from the licence rights helped to fund his manufacturing costs and, because each franchise was self-financed, Singer was able to tap into the entrepreneurial attributes of his franchisees.

This franchise model was copied in several industries.  Coca-Cola was able to expand throughout the United States by shifting the burden of manufacturing, storing and distributing its product to local business people who acquired bottling rights.  Car manufacturers who had been spending enormous amounts of capital tooling their assembly lines found they could develop retail distribution networks using capital provided by independent dealers.  Oil companies such as Standard Oil and Texaco granted franchises to convenience stores and repair mechanics across the US.  In the 1950's Ray Kroc saw the potential in franchising a successful hamburger stand.  He has been compared to Henry Ford for bringing the assembly line to the fast food industry.  Be they coffee and sandwich bars, fried chicken, pizza or taco diners, many food outlets are now franchised.

"Good franchising is very good.  It is undoubtedly the most efficient, effective distribution system ever invented.  It is the greatest invention of Western capitalism since the invention of the corporation.  Good franchising is so much better than independent small business operation and bad franchising is so much worse."

As stated by Professor Andrew Terry in the 1997 Fair Trading Report, which led to the introduction of the mandatory Franchising Code of Conduct.