Franchising does not guarantee success, but a good franchise should help
reduce the chances of failure.
A Proven System
With a tried and tested operating system, the franchisee loses the obstacles
and gains the opportunities. A franchisee should receive a completely
proven system that includes initial training, opening assistance, accounting
systems, established suppliers, manuals and use of the trademarks. The
all important "learning curve" helps prevent the franchisee
from repeating previous mistakes and provides information on inventory
levels, store design, competition, pricing structure and operational data
drawn from the entire system.
Easier Access to Financing and Reduced Cash Requirements
Financial institutions prefer to lend to established franchised systems
because of their higher success rate. The consumer awareness created
by national or regional name recognition can reduce the costs of grand-opening
promotional activity and advertising start-up. As well, the purchasing
power of the franchisor can reduce the franchisee's initial outlay for
equipment and supplies.
Collective purchasing power on products, supplies, extended health and
insurance benefits, equipment and advertising can easily offset any ongoing
royalties paid by the franchisee.
Site Selection Assistance
Franchisors can provide expert site selection assistance based on their
operating experience and demographic knowledge. Landlords and developers
prefer to deal with someone who has an established track record. This
enables franchisees, as part of an established franchise system to obtain
locations in major malls and other developments that otherwise would not
be available to them as an independent operator.
Most independent businesses cannot afford the services of advertising
and promotional experts. Consequently, their advertising is often poorly
conceived and inconsistent. They also cannot afford to invest in the
level of advertising required to maintain a commanding presence in the
marketplace. In a franchise system, the advertising cost is spread over
many units enabling the franchisor to achieve economies of scale. This
also allows the franchisee to create well-conceived promotional campaigns
and place the advertising in the most effective medium.
Because of the national or regional name recognition, and territorial
exclusivity, a franchised business should sell faster and for a higher
value than an independent business. A buyer is often motivated to buy
the franchised business for the same reasons as the original franchisee
and may perceive a higher value associated with a recognized name and
The ability to operate more effectively and efficiently can relieve many
pressures of business. Systems that control job scheduling, cash flow
and inventory levels allow the franchisee to run the business instead
of the business running them.
The Cons of Buying a Franchise
Loss of Independence
The loss of independence can be viewed negatively by some franchisees.
Although most franchisees invest in a franchise because they want the
guidance of the franchisor, the moment they enter the franchise system
they want to make changes. Unless you are capable of working within a
system and can accept a certain amount of regimentation, you should think
long and hard before entering into a franchise relationship. One of the
greatest strengths of franchising is consistency amongst units, and with
consistency must come compliance.
Franchisor's Failure to Perform
Some franchisors don't deliver what they promise for a couple of reasons.
A common reason for failure is the franchisor's shortage of available
capital, which can be caused by:
The franchisor's unrealistic franchise sales projections;
The franchisor underestimating the expenses associated with the development
of the franchise system;
The franchisor's failure to meet franchise sales projections, or
High franchisee attrition.
Alternatively, it could be that the franchisor is just not capable of
providing the support and assistance, or does not possess the ability
to operate a franchise organization.
Misunderstanding the Franchise Agreement
Confusion over the interpretation of certain aspects of the franchise
agreement can result in a problem with either the franchisor or the franchisee.
A potential franchisee has probably never encountered a document anywhere
near similar to a franchise agreement. A franchise agreement requires
careful explanation and scrutiny, and failure to do so will inevitably
result in a conflict that may end up in the courts.
Misrepresentation by the Franchisor
Misrepresentation by the franchisor can be intentional or unintentional.
Projections of income and expense can be provided to the franchisee in
good faith, but may turn out to be inappropriate for the location because
of the franchisor's inexperience or unfamiliarity with the area's demographics.
Conversely, the figures may be total fabrications simply to get the franchisee
to sign on the dotted line and hand over the initial franchise fee.
Caveat Emptor (let the buyer beware), applies to franchising as
it does to any consumer purchase or investment; however, consumers are
often their own worst enemy, choosing to ignore cautionary advice and
warning signals, and basing their investment decision on emotion without
balancing it with logic.
Payment of Fees
The franchisee typically pays an initial fee for being granted the franchise,
using the system, and receiving initial training. Typically, single-unit
franchise fees are in the range of $25,000 to $35,000. The initial fee
is paid only once during the term of the agreement; however, franchisors
may charge a nominal renewal fee at the commencement of each new term
of the agreement. The typical term for a franchise agreement is 5 or
10 years but may vary to coincide with the terms of a lease. Franchisors
sometimes charge a site selection fee of $5,000 or more, in addition to
the initial fee, which offsets their costs of site selection and lease
In addition to the initial fee, some form of ongoing royalty is paid
by the franchisee to the franchisor. In most instances, the royalty is
based on a percentage of the Franchisee's gross sales, which vary from1%
to10%, or even higher, with a median range of 3% to 6%; however, units
with high sales volumes often pay 1% or 2% less.
Franchisees are also required to contribute to a national or regional
advertising fund, which is in addition to any requirement that the franchisee
invests a minimum amount on local advertising.
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