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Category Archives: Franchise Primers

Resources that address franchise business dilemmas.

Chain Vs. Franchise

As a business grows there are many strategic decisions that must be addressed. One of the decisions that the parent corporation must make is whether it wants to directly own all of the units or if it wants to allow outside investors to buy franchises. There are benefits to keeping the chain entirely corporate owned and to selling franchises.

Definition of Chain
A chain is a group of one or more stores that have the same name, sell the same products and follow the same corporate policies. Chains can be local, regional, national or international.

Corporate-Owned Chains
When a chain is corporate owned, the parent corporation owns all of the stores or units. The corporation runs the day-to-day operations and the profits or losses of each unit belong to the corporation.

Benefits of Corporate-Owned Chain
A corporate-owned chain retains total control of each unit. It can set all policies and procedures in each unit. The corporation also retains all of the profits from each unit.

Corporations sometimes sell franchises. This is called a franchised chain. A franchised unit is owned by an outside investor. Each franchised unit must follow certain guidelines set up by the parent company. These include the types of products that can be sold, operating procedures and many times the prices they can charge.

Benefit of Franchising for Corporation
Corporations sell franchises as a way to expand. The franchisee takes on the financial burden of building a unit. In exchange for the time-tested business plan, marketing power and brand name, the franchisee pays the corporation royalties.

Benefits of Buying Franchise
Unlike starting a new business from scratch, many new business owners decide to buy a franchise. They get a proven business model, the buying power of a large chain and consumer awareness of a large brand.

By: Eric Scott, Demand Media http://smallbusiness.chron.com

Franchise vs. Company Owned Benefits

Deciding whether you should franchise your small business to accelerate expansion and supply more capital or if you should maintain a company-owned model depends on numerous factors. Understanding the benefits of both business models can help you begin to determine which model offers the greatest benefits for you and your business.

Franchising your business gives you an advantage when it comes to funding. Instead of having to take out business loans or use your own money to fund business expenses, you use others’ money to expand your business into new markets. Using others’ money to expand into other markets allows a business to potentially expand faster than if it were to stick to a company owned model.

A company owned business model allows you to stay more flexible as you navigate novel or changing situations or markets. If you want to institute changes to products or practices in your business under a franchise model, you may need to negotiate changes with the franchisees and write new franchise agreements. With a company owned business model you have the freedom to institute changes with greater speed and ease.

Internal Resources
Expanding your business into new markets requires effort as you look for one or more locations for your business, deal with local laws and regulations and learn the local resources you may leverage to promote your business in the area. Franchising shifts these activities to the franchise owners as they bring their own knowledge and skills to the organization, but you do not have to pay wages or provide benefits to these people since they are not your employees. With company owned businesses, you must have more management to oversee the greater number of employees you have working at each location, requiring more internal resources from the company.

Franchisees have a very personal reason to work hard and ensure the business performs well, since they have invested their own money in the business. If the business performs well, the franchisee stands to gain monetarily and if the business fails, the franchisee may lose his investment in the business. Franchising your business allows you to assume less risk, spreading the amount of risk to the franchisees as well. A company owned business model does not leave the business open to lawsuits that result from the actions of others, which is a reality for some franchisers as a result of the actions of franchisees.

By: Steven Symes, Demand Media  http://smallbusiness.chron.com

Starting a Business – Franchising

A business idea for a start-up doesn’t have to be original. Many new businesses are formed with the intention of offering an existing business idea. The use of franchises is a great example of that.

The basic idea for a franchise is this.
A franchisor grants a license (the “franchise“) to another business (the “franchisee“) to allow it to trade using the brand or business format.

That might sound a bit complicated! The trick is to remember that the franchisor is in charge – the franchisor is the original owner of the business idea.

Franchises are a significant part of business life in the UK:

  • Franchises generated annual sales of £12.4 billion in the UK in 2007
  • There are over 800 different franchised business formats in the UK and that number is rising by around 5% each year
  • The average sales turnover per franchise outlet is £360,000
  • 90% of franchises are reported to be profitable
  • A franchise has average borrowings of £70,000, suggesting that banks are happier to make loans to franchise businesses than other start-ups
  • The typical franchisee is aged 47. 66% are men and 86% of franchisees are married!
  • Franchises are particularly popular in the service sector

Examples of well-known businesses that use franchising to expand their operations include:

  • Subway
  • McDonalds
  • Starbucks
  • Pizza Hut
  • Thorntons
  • Molly Maid
  • Prontaprint

You might have noticed from the list above that nearly all those businesses provide services rather than produce goods. Franchising is particularly suitable for service businesses.

Advantages of running a franchise
For a start-up entrepreneur, there are several advantages to investing in a franchise:

  • It is still your own business – even if you are sharing the profits with the franchisor
  • The investment should be in a tried and tested format and brand
  • The franchisee gets advice, support and training. The franchisor will also supply key equipment, such as IT systems, which are designed to support the operation of the business
  • It is easier to raise finance – the high street banks have significant experience of providing finance to franchises
  • No industry expertise is required in most cases
  • The franchisee benefits from the buying power of the franchisor
  • It is easier to build a customer base – the franchise brand name will already by established and many potential customers should already be aware of it
  • The franchisee is usually given an exclusive geographical area in which to operate the franchise – which limits the competition (since operators of the same franchise are not in direct competition with each other)

Overall, investing in a franchise is a lower risk method of starting a business and there is a lower chance of business failure

Disadvantages of running a franchise
There are several disadvantages for the franchisee:

  • Franchises are not cheap! The franchisee has to pay substantial initial fees and ongoing royalties and commission. He/she may also have to buy goods directly from the franchisor at a mark-up
  • There are restrictions on marketing activities (e.g. not being allowed to undercut nearby franchises) and on selling the business
  • There is always a risk that the franchisor will go out of business
  • The franchise needs to earn enough profit to satisfy both the franchisee and franchisor – there may not be enough to go round!

There are many good franchise opportunities available for a start-up, but some poor ones too. So there is still a need for the entrepreneur to do market research into the franchise

A franchise is a kind of “halfway house” for a budding entrepreneur. It is a lower risk method of market entry and it is often easier to raise finance. However, running a franchise does not offer the same kind of long-term financial rewards that owning a business outright can.

By: Jim Riley  http://www.tutor2u.net

Should You Buy a Franchise or Start Your Own Business?

Marc was facing a point in his life when he felt he needed more than just a paycheck. He wanted a job where he could call the shots, but he had two problems: he wasn’t sure about what business to pursue or where to begin looking. He determined he wanted to own a business, but couldn’t come up with a unique idea and formulating a business plan seemed overwhelming. He finally decided to invest in a coffee store franchise which fit perfectly with his restaurant management background.

For many people the most difficult part of going into business is deciding what the business should be. There are generally three options when considering a business venture: buy a franchise, buy an existing business or begin a business from an original idea. For help in deciding your best course of action, here are the basics you need to know about each.

Buying a Franchise
Buying a franchise business is like buying a pre-fab house – all the components are there for you already. The only decision you have to make is which franchise.
Franchises are proven business models that have an established method of marketing a product or service. The franchise concept is used in a variety of industries including restaurants, real estate, cleaning services and more.

The advantages of buying a franchise include:

  • Established training and support for franchise owners from franchisor.
  • Brand name recognition with proven products and/or methods.
  • Greater efficiency with higher expectation of success (in fact, according to the U.S. Department of Commerce less than five percent of franchises have discontinued since 1985, while 35 percent of new businesses close within the first year).
  • Often you receive lower inventory prices due to established supplier agreements.
  • The disadvantages of buying a franchise include:
  • The franchisor establishes the rules to which you must adhere.
  • Generally there are a variety of additional costs which may include an initial license fee, training costs, promotion charges, and franchise fees (royalties — which can be as high as 18 percent of sales) all payable to the franchisor.
  • When the franchise agreement expires, the franchisor may choose not to renew your lease.
  • Start up costs range from a few thousand to hundreds of thousands for bigger name brands.

Make sure to fully investigate and get a clear understanding of terms like “initial cost,” “initial fee,” and “total cost” along with “cash required,” “initial cash required,” “investment,” “down payment” and “equity investment,” as they may mean different things in different offerings.

Buying an Existing Business
Buying an existing business has some of the advantages of buying a franchise, but without some of the headaches of dealing with the franchisor. However, full responsibility now falls squarely on your shoulders without any backup or support.
A few things you should consider before buying an existing business. Do thorough research and due diligence on the business, consider your funding options and the information you will need to obtain, and most important of all, get professional assistance with the negotiation, valuation and purchase process.

The advantages of buying an existing business include:

  • The initial groundwork of setting up the business is already done.
  • It may be easier to get financing because of a proven track record.
  • The market, customers, reputation, and contacts are already established.
  • Hopefully the problems have already been worked out.
  • The disadvantages of buying an existing business include:
  • The initial investment is generally very large.
  • You need to consider why the current owner is selling.
  • You may need to invest more money into the business to ensure success.
  • If there are already contracts in place, you may need to honor or renegotiate them.
  • The current staff may come with their own baggage.

Starting a New Business
While this route may be the most personally satisfying of all, it is also the toughest. Starting a new business from scratch allows you complete freedom to decide what you want to do and how to do it; however, it also means the responsibility is on you to do everything from the financials to developing marketing and supplier relationships.

The advantages to starting your own business:

  • You’re not obligated to follow anyone’s rules but your own.
  • Profit minus start up and expenses = your income.
  • The startup costs may be lower especially if you start with a home-based business.

The disadvantages to starting your own business:

  • You are responsible for all the work including financials, marketing, supplier relations, hiring support personnel and staff.
  • Hours will probably be long while you build name recognition.
  • If the business fails, it is probably because of you.

By: Barbara Poole Employaid, Inc.

Wants to start own business ?

Cape Town – For someone who has caught the entrepreneurial spirit and wants to start their own business, their choices are typically twofold: buy a franchise or start from scratch. Both have strong benefits, as well as risks.

The Ocean Basket business model began as a mix of owned and franchised stores, and the directors had therefore given this point considerable thought before opting to make Ocean Basket a purely franchise restaurant chain.

Most people starting their businesses from scratch tend not to think at first of a franchise – usually they have a skill set they are keen to leverage and typically want to be their own boss. What such people often fail to appreciate is that these desires can be entirely accommodated by buying a franchise.

Being an independent business owner means you have to contend with franchise heavyweights that have a lot more resources for advertising and marketing, as well as ready-made brand recognition.

When creating a startup business, most entrepreneurs have little time and less capital for getting their name out, especially in cut-throat markets like food service, hospitality and retail.

Therefore, things to consider if you are starting a new business and most likely putting all of your energy into operations, is: who will drive the sales? What product or service will you be offering?

Do you know how to draw up a business plan for raising finance? Is your location already crowded with businesses of the type you want to start?

Are you okay with having to deal with all of the hard decisions that come up in business, dealing with all the stakeholders such as customers, staff, banks and investors?

Owning your own business can be incredibly lucrative, especially if it is a “blue sky” type venture, but it can take years for such a business to turn a profit. It is for all these reasons that the idea of buying and owning a franchise has taken the retail market by storm as the preferred business model for many entrepreneurs.
There are many other reasons too. For instance, there is a higher failure rate among new business ventures than among those who buy a franchise.

This is because they enjoy no management support or franchise community for advice or to bounce ideas off.

If you start your own business, it’s often more difficult to get financing for a company that doesn’t already have a track record.
There are also no economies of scale in terms of purchasing and real estate, no brand recognition, and higher costs for things like advertising and design – costs that are shared in a franchise system.
A franchise is based on a proven business model. There is very little trial and error to owning a franchise.

By: Manny Nichas  http://www.fin24.com

Is Your Business Right for Franchising?

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