Why should entrepreneurs choose Franchising?

22nd Jun 2009
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Starting up a new venture can be a risky affair. You can painstakingly explore and research your market, time the set

up to perfection, open your business where demand is high, outdo the competition, offer the best range of products and services available, advertise in the right places and still your business can fail. In fact global Small Business Statistics indicate that one half of new businesses close within the first 3 years of trading. When describing exactly what a franchise is, the important thought is “the right to do business in a prescribed manner.”

Recently, franchising has been enjoying more acceptability vis-à-vis an independent business. There are inherent benefits in the franchising system, which make them more competitive in the market place. Apart, from the inbuilt benefits in franchising You can be your own boss, you're operating under a trademark that has instant brand recognition, and the failure rate for franchises is lower than it is for mom and pop businesses."

As we further analyze these two different ways of being in business we are confronted with a dilemma. Both have its positives as well as their downsides.

The Success Factor / Risk

Risk is a critical factor affecting any business plan. It has to be evaluated. This age is characterised by massive competition. It is no surprise, therefore, that entrepreneurs who want to run their own businesses but also keep their exposure to risk to a minimum often choose to buy into a business which has already proved to be commercially viable.

Franchised businesses are more likely to succeed that many other startups because they have a proven track record and have established and effective processes in place.

Training and Support

By buying a franchise in such a firm, the new business owner can get a head start in the market, benefiting from the experience, support, market presence, buying power, research and innovation of the host business (franchisor). He does not have to reinvent the wheel and discover the various problems he will encounter while running his business. He does not have to spend precious time and time in trial-and-error way of learning.

Access to an Established System / Successful Business Formula

The franchisor will have put processes in place that act as a map showing the franchisee the route to business success. This business formula will have been tried and tested and should be clearly defined.

The real difference between franchises and independents businesses is not what they do but how they do it.


Aspiring entrepreneurs choosing to become franchisees certainly expect to improve their chances of survival during the turbulent early years of business startup and operation.

Only 10% of new businesses reach the 10th year of business operations, whereas 90% of the franchise operations are successful. This success rate can be attributed to the Established and Proven System.

Economies of scale

Being a franchisee also enables you to operate in a larger business arena than you would be able to if you were a standalone firm. This wider commercial environment means that you can benefit from economies of scale and better business deals and it may enable you to recruit higher-skilled staff and offer better employment benefits.

Franchisees contribute towards a common advertising fund, which enables them to spend on important medias. This expenditure would not be possible had it been for a standalone.

Alignment with a franchisor parent company offers the franchisee managerial assistance, access to financial capital, and access to markets

THE DIFFERENCE

In the beginning, a prospective independent business owner chooses a name, then an identification scheme for the company vehicle, letterhead and business cards. A yellow page ad that complements a marketing plan is developed, and a sales procedure to communicate a positive message to the buying public is created. In addition, a decision must be made as to the cleaning procedure the company will deliver to its customers before the machinery and cleaning solutions are purchased to support that decision.

On the other hand, a prospective franchise owner investigates the various franchises available. When the choice is made and the franchise is purchased, a complete business system is delivered. The patented equipment and proprietary cleaning solutions are only a small part of the package. Business cards, letterhead, truck signage, advertising pieces, technical/management/sales manuals, customer invoices, and business software may also be part of the initial delivery. Lack of Independence / Freedom

A Franchised Business is may not be suitable for maverick entrepreneurs. Franchised operations call for uniformity, they do not encourage system-wide creativity and innovation, as it may lead to differing products and services. Freedom is severely curtailed.

The contractual obligation binds the franchisee to follow the stipulated guidelines as documented in the Operations Manual. If you value your independence, buying a franchise is probably not for you.Agreements vary from business to business but many franchisors will only allow you to sell the products that they approve and normally supply. You may have no flexibility to modify your product range or service to suit your market.

Suffice it to say that an independent business offers freedom of choice, but the franchise offers the security of working with a known product or service and the guidance of the franchisor.

Greater Investment / Less Profitable

Franchise operations are no doubt, larger scale, better capitalized young firms, however in certain industries especially consultancy services, the independent business startups are found to be more profitable and their survival prospects are better than those of franchises. As a franchisee is bound to pay royalties and make regular contributions to the Advertising Fund.

Buying a franchise can be expensive. You will probably be required to pay an upfront fee to buy into the franchise as well as pay royalties on sales or management fees. You will probably be required to buy all your supplies and raw materials from the franchisor or his favoured supplier, even if it is not the cheapest supplier available. All these fees are on top of your usual operating costs.

 

Dhawal Shah is a Certified Franchise Executive from International Franchise Association, Washington DC, USA. He is currently the founder of FranchiseExpo.in  and Way2Franchise.com, these websites provide Franchise Opportunities, News, Reviews and Analysis for Indian Franchising. He can be reached at Dhawal.Shah@way2franchise.com   

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