Franchising is a form of business by which the owner of a product or service (Franchisor) provides a second party (Franchisee) a licensed privilege to do business using the Franchisor business model in exchange for certain fees and agreement to follow a specific recipe.
The Franchisor offers the Franchisee a business model that promises success and minimizes the risk of starting their own business. You get instantly a brand name that attracts customers, a marketing and advertising budget, training, merchandising and support that make you feel you run your own business.
In reality however, you really never buy a franchise, you rent a franchise for a certain period of time. A franchise is merely a temporary business investment involving renting an opportunity. Furthermore, the rewards and risks are not evenly distributed between the Franchisor and the Franchisee.
Most Franchisees are really “buying a job”! What you pay in return for that job however is a very high price. Here is a simple question: Why do successful businesses choose the franchising route to grow their business? Why do they choose to accept the many “headaches” associated in dealing with franchisees when they can go at it “solo” the corporate way? Simply put: By choosing the franchising growth strategy, franchisors reduce their capital investments and reduce their liability risk. Two huge benefits!
It is a fact though that Franchises have a higher rate of success than start-up businesses. Successful franchises include McDonalds (restaurant), Starbucks (café), Hampton Inns (hotel), H&R Block (Tax preparation), UPS Store (courier and printing) to name some leading ones.
The common denominators for these franchises are either a strong brand that attracts customers or that they offer services that only a global brand can provide. The average consumer will most likely stop at a McDonalds on the Highway rather than Steve’s Hamburger and the average traveler will book a room at the Hampton Inn rather than the unknown Steve’s Inn.
Strong brands attract customers. But for many businesses that serves the same customers in a relatively small geographical area, Steve may not need the big Brand name, but he must offer an excellent product / service at a competitive price at par with big Brand. If Steve displays a handmade unlit sign, use shabby interiors, offers poor service and serve lousy coffee then failure is waiting.
Many times, I have advised entrepreneurs not to go the franchise route and suggested they go work for a franchise a short time as a simple employee. Once they learn the business , they can then open their own business. Those that didn’t take the time to learn and went the franchise route lost a lot of money in spite of long working hours and many sacrifices. Those that heeded the advice did well.
Consider the following: As a Franchisee you cannot change the product, nor the price, nor suppliers, nor make changes to the formula, nor even sell the business to others and you must give away a fixed percentage from the top regardless of the condition of your bottom line.
For example, the profit margin of restaurants is in the range of 0 to 15%, the average is 5 to 7%. If the Franchisor takes 5% from the TOP, what is left for you? Read the Franchise agreement together with your lawyer: 90% of all points cover the rights of the franchisor and/or the obligations of the franchisee.
Franchising in North America is a huge business. In Canada, it is estimated that franchising involves 1’300 brands, 80’000 units and accounts for 20% of consumers spending, so it must have merits. Some franchises are excellent but for the most, the winners are certainly the Franchisors, not the Franchisees.
If you are considering a franchise, do your homework, speak with existing franchisees and check out the franchisor’s reputation before you make your decision. The pain of discipline is far better than the pain of regret.