What is Franchising?
If you want to get into business for the first time, then consider franchising.
Put very simply, franchising is a way of expanding an existing business through the licensing of its business model and brand to an individual entrepreneur – such as yourself.
You – the franchisee – pay the business operator – the franchisor – a fee for the privilege of using a brand, and for selling a set of products or services. This provides you – the franchisee – with a tried and tested business.
The franchisor sees an expansion of its operation, while the franchisee has a robust business that they can grow as they see fit. The franchisor takes some sort of management fee, usually a percentage of revenues, however it is the franchisee’s business.
So why should you take the risk in putting up the capital, while the franchisor sits back and siphons off revenue?
That’s precisely the point – a franchise actually poses less risk. Nine out of 10 franchises survive their first year, and the same proportion say they make a profit; 90% of start-ups fail within the first three years.
The Benefits of Franchising
But what makes a franchise so much safer? Well, you have the use of a ready-made, well-established brand; instantly you are bequeathed public trust in the products you sell or services that you are licensed to render.
Should potential franchisors not worry about the damage someone could do to a brand they have worked so hard to develop?
This is why good franchisors will train them in business skills and sales techniques – so they can represent their brand as well as the franchisor has done. Having the know-how of an established and authoritative industry player behind franchisees gives them a major advantage over the start-up operator.
To protect the quality and consistency of the products or services associated with the brand, a franchisee also has to sign a legal agreement at the outset. Called a franchise agreement, this stipulates certain practices and standards of behaviour they have to adhere to, and sets parameters defining how far they can stray from brand standards, such as décor, food ingredients or opening times – generally not very much. This legal document usually covers a minimum period of around five years.
So the franchisee sacrifices creative freedom and part of the profit, but knows that at least he or she is going to make a profit…
Yes – savings are made elsewhere that can offset the money taken by the franchisor. The franchisor will usually pay for all the advertising and marketing. And if it is a huge, international brand such as Subway or Gold’s Gym then you know you are guaranteed a seriously heavyweight marketing budget behind you.
Franchising sounds ideal for people new to business – but don’t franchises tend invariably to be fast-food restaurants?
Not at all. There are 718 franchisors operating in the UK, in a wide range of industries. Sandwich shops, plumbers, car-hire businesses and laundries – these are just a few examples.
So what was the first-ever franchise?
Ale brewers in Germany granted the exclusive privilege – which is what ‘franchise’ translates as in archaic French – to certain taverns to sell their ale in the 1840s.
But it was the Singer Sewing Machine Company, which started granting distribution franchises in 1851, that was the precursor for the modern franchise.
Buying The Right Franchise
The choice of franchise opportunities is bewildering. Every year, more new concepts come to the marketplace.
One of the most frequently asked questions we get at vidabo.net especially from first-time buyers, is how they can find out whether a franchise is a good opportunity or not. How can you find out whether you’re investing in a sound and credible business?
Assuming you’ve made contact with the franchisor (the franchise company that will be selling you the franchise), make sure you investigate the opportunity thoroughly.
Remember, you are about to invest a large amount of money. If you were spending the same money on a new car wouldn’t you first take it for a test drive? You’d be amazed by the stories we hear of people who don’t even conduct a basic investigation before handing over their hard earned cash.
Before you consider signing a contract with a franchise concept that interests you, make sure you speak to at least three existing franchisees (other people like you who’ve bought the same franchise that you’re interested in) and interview them (over the phone or in person). Ask the franchise company to give you the names or go find them yourself. Find out from other franchisees what it’s like to be part of this network. Ask how long they’ve been a franchisee, ask them what the downsides are and more importantly, ask them how much money they are making. Don’t be embarrassed… you need to know how much you are going to make. You need to know what the company is really like. You need to know how much support you’re really going to get.
Any good and credible franchise organisation will be more than happy to supply you with the contact details of other franchisees in the group. A good franchise network is like a happy family – the other franchisees will also be more than willing to talk to you. If you detect that this is not a happy family, if you come across disatisfaction and disillusionment, then you can cross this opportunity off your list and move to the next one. You just saved yourself a great deal of pain.
Make sure that you consider more than just one franchise opportunity. Okay, so you are 100% certain that you want to buy a bagel franchise. Why not talk to a carpet cleaning franchise or a pet food delivery franchise as well? You say you are are 100% certain you want to buy a bagel franchise and delivering pet food is not what you imagined. But what have you got to lose? The more franchise companies you see, the more you will learn about franchising as a whole and how it works. And you never know… you may just come across something you never expected – a great franchise company.
Our suggested ratio goes something like this… Get information on at least 30 franchise concepts. From those 30 make appointments to visit 6 in person (and make sure you have a two wild card entries in that list of 6 – a wild card being a franchise you would never normally consider).
Once you’ve met 6 franchise companies face-to-face, cut your list to a final three. Yes, this really is a bit like Pop Idol (or American Idol for the US). With this final three start making the calls and visit at least three franchisees (as mentioned above). That’s a total of nine calls or visits to make sure you’re joining a happy family.
Out of your final three you may have a favourite but make sure you give the others the best possible chance of winning your money. That’s how you have to see it. To narrow down to the winner you should get access to the financial records of the company, you should test the product or service of the franchise by being a customer and you should see if you can spend a day working alongside an existing franchisee. This way you get to test the business on both sides of the counter.
There is no magic formula to finding the right franchise. However, what we are saying here is that you must be a detective and uncover the truth about what you are buying into. Every insight you get into the franchise you are buying will either put you one step closer to that opportunity or one step back. Get as many insights as you can. If will cost you nothing. Only time. But it could save you a fortune.