Many people see money to be made from owner your own business. While this can be true, money and rewards come from hard work.
Of those who have the notion that a business brings you wealth many people have the idea that in franchising a lot of money can be made with minimum effort. This is a serious misconception. As with any business, the person in a franchise system that works the hardest with the right goods and or services profits the most.
What is franchising?
Franchising is a method of marketing and distributing a company’s goods or services. It involves a contract of fixed duration between two parties, the franchisor and franchisee.
The franchisor grants to the franchisee a license to market the franchisor’s goods or services using the franchisors business getup and systems. Franchisors are to provide continuing management support and advice, know-how and brand identification.
Franchisees enjoy the right to profit under what is hopefully a proven business system and for the benefit of being involved in a proven system the risk of them losing their investment is less than if they were to start a small business on their own. It is not impossible to view what McDonald’s, KFC, Pizza Hut and the other franchisors do and seek to emulate that for yourself. But to do the research and establish an unknown brand of fast food is riskier than joining a known franchise operation.
The advantages of franchising
The advantages of franchising to a franchisor include:
- Payment of a sign on fee;
- On-going franchise fees;
- Larger advertising budget from the contribution of all of the franchisees advertising contribution fees;
- Reduction in middle management costs;
- Savings from workers compensation, lease, employee salaries and over outlet operating costs; and
- The benefit of the enthusiasm of the franchisees being owner operators receiving a profit on their efforts and not just being employees.
The advantages of franchising to a franchisee include:
- Right to use an established and known trade mark;
- Right to use the goodwill of the existing franchise operation;
- Participate in increased buying power of a group;
- Use a proven business system;
- Receive training on manufacturing, preparation skills, accounting, business controls, marketing and merchandising and management;
- Assistance in managing employee relations, setting of wage standards and employee training;
- Access to initial and on-going market research from the franchisor and the fellow franchisees; and
- The franchisee is an owner operator not an employee.
Two main reasons why franchises fail
Taking up a franchise on paper seems to have a lot of benefits and is suitable for anyone but is it? The Final Report of the Beddall Franchising Task Force (December 1991), gave as two of the six main reasons for franchise system failures as:
Poor Franchisee Selection; and
The Beddall Report concluded that one of the major weaknesses of franchising to date was poor franchise selection. The report read: there is a “tendency, particularly in small franchise systems, where capital is tight, to take people with the money, but who do not necessarily have the appropriate skills or personality” to be a franchisee. (See page 21.)
Another main cause of franchise failure was the greed of franchisors. Instead of franchisors seeing their income from a win – win with the franchises, too often, franchisors see their income not from the long term receipt of royalties where the franchisor benefits from the growth and success of the franchisee, but greedily seeking excessive up-front fees or taking excessive on-going royalties, “thus depriving Franchisees of working capital” (see page 22). One example of the later situation was the 2008 collapse of the 26 year old Kleins jewellery and accessories chains. Part of the problem for Kliens was its greedy franchise model. The franchisor charged franchisees around 15% royalty and a 5% marketing contribution, as well as making a margin on the product it sold to franchisees wholesale. Franchise operations became more and more unprofitable. To stave off problems from failed franchisees, the franchisor of Kleins bought back the franchises. However, the increased overheads of running unprofitable outlets eventually became too great and the entire franchise system franchisor and franchisee’s failed.
A gram of protection is worth more than a kilo of cure
Although it is in the franchisors interest to ensure that the people selected as franchises have the appropriate traits and skills, if you are considering on either taking up a franchise, or starting your own business take this quick quiz, to see if you are cut out to be a franchisee. As stated previously, even by taking on a franchise, your return on investment is based upon hard work. In some cases the work may even be harder, where you have to operate and conduct business using systems that are not yours; but those of another person that you must adhere to and comply with.
Franchisees must lay the same foundations as with any business. You must be prepared to work long hours, do the hard jobs, and to a certain extent accept that your employees will disappoint you on occasions.
Etienne Lawyers has 35 items for you to consider but the initial and main questions to ask yourself to see if you are the right stuff to be a franchisee are:
- Will your franchise be taking a considerable amount of your time away from your family?
- If so, how do you fee about that?
- Is your family enthused about the franchise?
- Will you enjoy working with them if they will be employed in the franchise?
- Have you the skills to manage and supervise employees?
- Do you have the necessary capital resources for working capital?
- Can your life style accommodate you making financial sacrifices should the need arise?
- Are you emotionally prepared to work long, hard hours?
- Do you have the character traits or background to succeed in owing a business that is constrained by rules and systems not of your making?
- How much do you want the business to reflect your own individuality?
As you can see most of the ten questions are about you. The reason for this is that empirical research reveals that those better suited to franchise ownership are ex-military, public servants and middle management personnel of large organizations. The reasoning behind this is that those people have succeed in these backgrounds have the right traits of adhering to the operational guidelines of a franchise system whilst being able to introduce within those guidelines innovations and new ideas. Such people do not want or need to have the business they own and operate being a reflection of them. They are able to succeed within the rules of the franchise and accept that their success is due both to their own abilities and those of the system. Whereas, a person who wants to have their business reflect them, true entrepreneurs, find succeeding in a franchise system difficult; if not impossible. Entrepreneurs’ are the franchisors not the franchisees. These people do not have the necessary traits to work quietly within a system. Their desire to introduce change makes them unsuitable to be a franchisee. The rule breakers end up in dispute with the franchisor and court cases abound to the high cost of both franchisor and franchisee.
Don’t rely on your own answers.
When considering a business venture, be it a franchise or not, don’t be afraid to seek advise from a number of your family and friends about to get their answers to the questions, to see if you are fit to buy and run a franchise or start your own business.