Franchising is a type of business agreement that lies somewhere between buying a business and starting your own business. This involves a contract between the franchisor (Burger King, subway, mailboxes, etc.) and you, the individual entrepreneur, called the franchisee.
The franchisor offers the franchisee his well-established brand, experience, knowledge, training, support and proven methodology. In return, the Franchisee pays an initial fee and continuous license fees.
I present Franchises in the context of Bootstrapping because it almost completely solves some of the experience / know-how of the limited resources equation. In terms of cost, many franchises will clearly be outside most new companies & # 39; reach. However, the franchise industry is so large and diverse that many of them have a relatively low initial cost. Recently Entrepreneur the magazine had an article with over 80 franchises that required an initial cost of $ 25,000 or less. (Entrepreneur.com)
Franchising is a large business sector. There are over 300 types of business categories serving over 18,000,000 employees and representing 3% of the Gross Domestic Product (GDP) in the US. There are many different categories of companies available for franchise. A partial list of various franchise companies is automotive, business services, children's products and services, education, financial services, food, healthcare, DIY, hotels and motels, maintenance, personal hygiene, pets, recreation, services and Technology companies and more each year .
Jeffrey Tannenbaum, former Wall Street Journal & # 39; s A franchise expert, he described the franchise as a mixed bag. He said: "For many people, the franchisee is a shortcut to prosperity, but for others it is a shortcut to hell."
Let's look at the pros and cons of franchising.
- He lets you be in your own company with limited knowledge of the industry and doing business. You use the Franchisor's documented successes, their training, methods of operation, suppliers, credibility, continuous support, etc.
- Some major risk business setbacks are reduced.
- Quick start for your business to work. Every aspect of starting and running a business is delivered. It would take much longer for the entrepreneur to start the business.
- Expansion : If you succeed, you can grow quite quickly thanks to the knowledge and cooperation of the Franchisor. They want to discover successful operators who have proven that they have what it takes to grow. Sometimes the franchisor will block your expansion plans despite your successful success. If this happens, you can get inspiration from Sam Walton, the founder of Wal-Mart. Sam's initial entry into retail sales was as a franchisee at Ben Franklin stores of 5 and 10 cents. He followed their formula and added his creativity and work ethic to become a leading franchisee. He began to expand, entering the cities of Arkansas. At first, Sam noticed the appearance of retail discount stores. He asked Ben Franklin's management to let him be a pioneer of the discount store under their umbrella. He was released quickly and Wal-Mart was born. The management of Ben Franklin did not know how deeply they would affect the history of retail sales.
- Due diligence: Franchise is a strictly regulated company. According to the law, every potential franchisee must receive upon request: Franchise disclosure document from the franchisor. This will give you details of the agreement with the franchisees, the financial strength of the franchisors, their list of existing franchisees and, in many cases, the list of former franchisees. You want to know everything about a potential partner.
- Training is provided to you and your employees. The learning curve of running a business is accelerated.
- In most cases Advertising and marketing brand is provided. In some cases, it may be necessary to contribute to its costs.
- Territory: You receive an exclusive franchise for a specific geographical area. No one else can use your brand in this specific area. This provision should be specified in detail in the contract.
- No control: You don't have the independence of a business owner. The franchisor requires strict compliance with their rules and the use of their systems. Changes require approval. You also have limited options for purchasing consumables, advertising methods, products you can offer and which you can't offer, sales volume, etc. Layout can be frustrating for a creative personality.
- costs it can be high, both the initial payment and the current royalties. However, you should never consider costs in a vacuum. They must be measured against your profits.
- royalties in most cases they are paid out by volume rather than by profit. This is usually not a great solution because one side may lose money and the other side may lose profits. Their interests do not match, although it is a partnership.
- Inequality: It's an unequal partnership. The franchisor has much more power. If the Franchisor does not keep its promises of support, you may not have much choice because most contracts favor the Franchisor. In addition, you may not have money to implement expensive legal options.
- Company sales can be difficult. Let's say you have been successful in building a franchise for years and now you want to retire or change your lifestyle. In an independent company, you have complete freedom to sell to anyone at any price. This is not necessarily the case for a franchisee. Some contracts do not allow sale or you can only resell the franchisor. This may not allow you to get a fair price. Therefore, you should try to solve this problem in the original contract.