When Should You Consider Franchising?
Franchising is the act of investing in what is supposed to be a tried and tested business formula. Examples of successful franchisers include Jollibee (fast foods), Mr. Quickie (shoe repair stalls), and Dimsum & Dumplings (food stalls).
The truth behind the franchise
Basically, a franchise is an authority. It is a right for a franchisee to sell the goods and services that have been developed by a franchiser. The premise here is that the franchiser has come up with a winning business formula, and that they make it easy for businessmen to simply buy into their formula for success.
Before anything else, note that a franchise is not a guarantee of success. There are well-established franchisers, such as Jollibee and McDonald’s, and these are characterized by powerful brands with lots of name-recognition, professional training, exacting quality standards and strong promotional support. Such seasoned franchising operations try to ensure that each and every new franchisee has a good chance of success. After all, it is to their interest that each new franchise succeeds, because failed franchises tarnish their name and reputation as sound business ventures.
But then there are also the barely established upstart franchisers, the ones with brands that do not even ring a bell and who have uncertain sales patterns. Many of these offer hardly anything else other than a stall and the use of their name. But then the cost of getting a franchise can be attractively cheap.
The risks involved
Here’s a rule of thumb: the more popular and less risky a franchise opportunity is, the more expensive an investment it is bound to be. And conversely, the cheaper a franchise opportunity is, the greater the operating risks involved.
What are these risks? First of all, as a potential franchisee, chances are that you will be required to propose a location for your proposed franchise operation. And the first risk that you face is: How sure are you that there is a market for the franchise’s products or services in your proposed location?
Professionally run franchising operations take the time to do studies of your proposed location. This way, they can be assured that a market does exist for their products after all.
On the other hand, less-professional franchisers tend to accept any takers regardless of the proposed location. They’re usually eager to close each and every franchising opportunity as quickly as possible, often without a care for the long-term prospects of the franchisee. So long as the franchisee pays the franchise fee, they’re eager to provide the franchise operation.
Second, the cheaper a franchise, the greater the likelihood that its business model hasn’t really been tried, tested and honed to perfection as yet. Obscure franchises that are offered at low cost often are a sign that the business has not been around for too long. The danger here is that the franchisers have not yet had enough time to make their businesses evolve into professionally-run enterprises. This usually means that there are still many unsatisfactory areas, and the business has not yet developed contingencies and strategies to deal with many issues that professionally-run franchises have already thought out. These issues include matters such as what to do when a customer complaint is received, or how to ensure quality control, or even how to properly train new personnel.
HINT: A sign of a professionally-run franchise organization is that it has a very THICK manual of operations that covers practically all aspects of the business.
Third, less established franchise organizations do not offer promotional support. Promotional support is very important since this is what makes the market aware about the franchisees’ existence. Professional franchising organizations invest a lot in advertising and promotions in order to ensure that their branch networks get the proper attention. On the other hand, less established franchises often do not have enough resources to perform promotional duties for their branches. This means that basically, franchisees will really have to fend for themselves in finding clients.
This is not to say that you should avoid investing in lesser-known franchise businesses. After all, who knows? Some of these may actually grow up to become industry powerhouses, and investing now means that you get into their business model on the cheap!
But you will have to assess the franchise opportunity wisely and remember that franchise operations are not a guarantee of success.
So when should you consider franchising?
A franchise is an investment more than anything else. And like any investment, you’d want professionals to be overseeing your investment whenever possible.
If you have the resources to invest in expensive yet professionally-run franchise opportunities, then these are certainly valid investment options. If you believe that the returns are well worth it, then go for it.
If on the other hand, you can only afford the lesser-known franchise opportunities, then just be aware of the risks involved. Remember that less-professional franchisers are often more concerned about closing the deal than about your long-term survival. In which case you better make sure that you are a pretty good manager, because you may have to run the business on you own with little help from the franchisers.
In short, invest in these lesser-known franchisers if you sincerely believe in their business idea or business model. But be prepared to run it as if it were entirely your own business, because chances are that they won’t help you in many areas, including promotions and providing tough answers to tough questions.