Written by: Kevin Bugeja
Are you thinking about buying a franchise and don’t know where to start? There are so many franchise opportunities to choose from. The process of choosing the right franchise can be very difficult.
Most of the people I meet are looking to buy a franchise because they hate their jobs, and will always hate their jobs. One of the greatest advantages you have when buying a franchise is the freedom to choose an industry that you are interested in and start your career again. Many of us decide at about 18 years old or when we leave high school on what we want to do with the rest of our lives. Let’s face it, most of us at this age really don’t have a lot of life experience and everything including working and earning money sounds exciting but this usually wears off and the typical applicant we meet is usually tired of working for a boss and making someone else rich and want to work for themselves. Luckily franchising allows these people to start again but to determine which business we should evaluate, we should first determine if we are in fact suited to franchising.
Top questions for self-assessment of the potential franchisee
Before choosing a franchise, you need to ask yourself the following questions:
- What are my strengths and weaknesses?
- What type of business attracts me?
- Am I suited to franchising and will I follow the direction of a franchisor?
- Do I have the ability, commitment and personality to run my own business?
- Am I willing to borrow the funds needed and can I afford it?
- Am I prepared to work long hours and do whatever it takes including making sacrifices to make it work?
- Do I have the support of my family, partner, spouse etc?
- Do I want a large business or franchise or do I want a business I can run from home?
- Do I want to buy into a well-established brand name or a start up?
When deciding, which franchise is right for you, you may wish to consider the advantages and disadvantages of large franchise versus small franchise systems. What can you expect from each type?
Well-Established Franchise Advantages
In large well-established franchise systems, the main advantage is that you are more likely to receive a proven system as well as a valuable and recognisable brand. You can determine that these two factors exist by research and talking with other people. In addition, conversing with existing franchisees within the organisation can demonstrate how well the system is working especially if the other franchisees have been in operation for a decent length of time.
Another advantage of investing in a large franchise is the lower level of risk you will experience. If the franchise has grown over time, it is likely that most of the kinks have been worked out of the system.
When working in a large franchise operation, you are more apt to receive solid support. You will probably work with more experienced personnel within the organisation. This in turn fosters the potential for lower operating costs due to the decrease in possible errors you might make within your franchise. Therefore, your potential for better profits is increased.
Well-Established Franchise Disadvantages
A possible disadvantage of a larger system is that there are usually stricter rules and regulations regarding operations. You are much less likely to find any flexibility within the organisation.
Also, larger operations tend to increase its multi-unit franchises within the organisation since those franchisees have already proven themselves. Therefore, it may be harder to obtain a franchise in the first place or end up with the ones that existing franchisees within the network have discarded as just average locations etc.
Small or Start-up Franchise Advantages
Smaller franchises are inclined to have simpler more direct systems. Franchisees receive the support that they need with focus on the most important issues, usually with a more personal touch. You will mainly deal directly with the senior people within the organisation.
Also, smaller franchises can offer more flexibility. These franchisors tend to allow some freedom for experimentation and are more open to suggestions for improvements.
Small or Start-up Franchise Disadvantages
One disadvantage of associating with a smaller franchise is that they usually have smaller budgets and more limited resources than larger organisations. This would hinder access to outside training programs and third party support that the large systems can offer. Technology may not be as up to date either.
A second disadvantage of smaller franchise systems is that their operating system may not be as well proven as that of a larger organisation. Therefore, the risk is likely to be increased.
Overall, you must decide what type of environment you are most comfortable working in. Do your research ahead of time, including talking with existing franchisees to determine what size organisation would be the best fit for you.
Franchise System vs. Small Business
When an entrepreneur invests in a franchise, he or she is much more likely to obtain a solid proven system than you are from an ordinary small business partly because a franchise is a larger company that is overseeing many smaller operations. The franchise company has typically developed a successful structure with the bugs worked out through trial and error over a period.
Research demonstrates that overall franchises have an approximate success rate of over 90 per cent as compared to small businesses started from scratch at only about a 15 per cent success rate.
What is provided by the Franchise?
A successful franchisor provides its franchisees with a business model that has been proven to work. The franchisors have typically spent a great deal of time and energy developing the most complete overall system to pass along to their franchisees. The better their system, the more success their franchisees and they will ultimately achieve as well.
The complete detailed system on how to successfully operate the business is passed to the franchisee including training, continuous support, and an operations manual.
As part of the system, franchise operators usually spend a great deal of time analysing methods and narrowing down the best combinations of products and services to market based on need. Demographics are also evaluated, determining the most lucrative locations for the franchises.
Marketing plans for pre-opening as well as ongoing operations are also components of the overall system that is presented to new franchisees.
How to Investigate a Franchise’s System
First, before investing in a franchise, it is important to research the operation as thoroughly as possible. Find out how long the franchise has been in existence. If the franchise has been in operation greater than ten years, it is more likely to have made it through several stages of growth; therefore, having a more reliable system in place.
Also, obtain firsthand information by speaking with other franchisees within the organisation to determine how the franchise has worked out for them. Find out if they have achieved the success that they expected.
By and large, investing in a franchise and its proven system offers entrepreneurs great opportunity for success without going through the many painstaking steps of establishing a brand-new business. With the franchise, they can concentrate on getting to know their customers and bringing in new business.
New vs. Established
A good rule of thumb is that a franchise system would be considered ‘new’ if it has been in existence for less than two years. There are several advantages as well as some disadvantages in joining a new franchise system.
Advantages
To begin with, new franchisors and their partners typically dedicate a great deal of their own resources to their newborn ventures. They have invested their time and money; therefore, they have a vested interest in making every effort to have their franchise become a success.
A new franchise organisation can be a nice way for franchisees to be part of a real pioneering effort. Franchisees can often feel as though they are partners in the new endeavor by actively participating in the evolution of the company as well as by recommending improvements.
Additionally, new concepts usually offer a great opportunity to get in on the ground floor before others jump on the bandwagon. Therefore, the investment can be quite lucrative.
At the same time, as a franchisee in a new system, prime locations are more likely to be available. In a more established system, key locations will probably be few and far between.
To market to new franchisees, franchisors tend to be more flexible on contract terms. A franchisee may have more leverage to negotiate conditions and costs.
Finally, if a franchisee starts out with the franchise at the very beginning, he or she may be able to move up to a higher position within the organisation. Becoming an area developer may be an option.
Disadvantages
Since there is little or no history behind the new system, there are typically more risks involved.
Also, new franchisors may not possess the experience or skills to provide adequate support and training to their franchisees.
Another possible negative of new franchise systems is that it may be more difficult for franchisees to obtain funding. There is little or no record for potential lenders to base their decisions on.
Lastly, it can take quite a while for a new brand to become established. Therefore, a longer wait may occur for a return on investment.
What to Look for in a New Franchise System
As with any new investment, it is imperative that potential franchisees do their research before committing to joining a new system. Use the Internet and speak to existing franchises to investigate.
First, determine if there is enough demand for the product or service. Also, decide if the item can be easily reproduced by someone else. You will also want to find out who the main competition is.
Additionally, it would be helpful to find out some information about the franchisor about the type of experience he or she had before establishing the franchise. If you find that there has been previous experience in the same field or other types of business experience, it is more likely that the franchise will turn out to be successful.
Overall, if you are brand new to franchising you will need to decide if you are comfortable learning franchising from a new franchisor or if you would be better suited for participation in a more established franchise.
How to Find a Franchise with Good Return on Investment
Savvy investors always make it a point to estimate the amount of money they expect to earn (return on investment) regardless of the type of investment they are making. In the case of franchising ventures, it is important to consider not only the monetary investment but the time spent in the business as well. Therefore, the return on investment should be greater than when contributing to a passive investment such as the stock market or real estate.
What is a Good Return on Investment in Franchising?
Returns of 10 to 15 per cent are usually considered decent about passive investments. However, since there is also a great deal of time involved in franchising in addition to the monetary investment, the return should be somewhat higher.
How to Determine the Potential Return on a Franchise
First, a more expensive franchise does not necessarily translate into higher returns. Returns will be driven in part by the management skills you bring to the business as well as the type of industry, the business model, and the market.
Studies show that higher returns are more likely to occur with investments of less than $200,000, and may even be quite possible starting the franchise with less than $50,000.
To discover the type of return to expect from a franchise, there is some preliminary investigating that should be done. For example, you should try to find out the average earnings of a typical unit over the initial three years of operation. This information is best gathered by asking the franchisor for some historical sales history across the group as well as speaking individually to existing franchisees in the network.
How to Increase your Potential Return
The main key to increasing your return is to find a good quality franchise in which you can make the best use of your skills as leverage. The combination of the franchisor’s business model along with your own investment of time and talents should be a good predictor of success.
Again, unlike a passive investment, in franchising the monetary contribution is not the only precursor for decent earnings. Therefore, it is important to carefully select a franchise that matches well with your personality and experience.
Top Ten Reasons to Buy a Franchise
Buying a franchise can be a life-changing experience. There are many reasons why you should fulfill your dream of becoming your own boss and open a franchise. The following reasons to buy a franchise will help you to understand why it will be a great investment. Contacting these franchisees should provide you with valuable information on what you can expect to earn.
- Turnkey Business
There are many entrepreneurs that have exactly what it takes to run a successful business but don’t have what it takes to get their business up and running. Whether it be financing, negotiating lease terms or even the confidence it takes to quit their job and start their own business.
Buying a franchise eliminates all the hard work: finding a location, negotiating a lease, hiring reliable contractors and doing all this on-time and within budget. When you buy a franchise, you are buying a complete turnkey business.
- Proven System in Place
When you buy a franchise, you buy a system. All franchises have an already-established system in place that you must follow. These systems are designed to improve the overall productivity and increase sales of each franchise. Having a proven system already in place eliminates the guesswork and errors a common business owner would normally face.
- Higher Likelihood of Success
Buying a franchise is very different from starting a mum and dad business. Since there is an already established system in place, there is a higher likelihood of success. If you follow the system the franchisor has put in place, you should be on your way to running a very successful business.
- Corporate Image and Brand Awareness
If you buy into a franchise system that is already established the corporate image and brand awareness is already recognised. Customers are usually more comfortable purchasing items they are familiar with and working with companies they already know and trust.
- Buying Power
Your franchise will benefit from the collective buying power of the parent company as the franchisor can afford to buy in bulk and pass the savings along to franchisees. Inventory and supplies will cost less than if you were running an independent company.
- Training
Most franchise companies offer a one – four-week training program that is usually held at their corporate offices or at an actual franchise location. This is what makes franchises stand out from every other business or business opportunity. The franchisor will train you to run you franchise the same way their other franchise locations are run. This will ensure that you are running your business efficiently and will help to eliminate any common mistakes a new business owner usually faces.
- Ongoing Support
When you buy a franchise, you are never alone. You will always have the support of the franchisor and the support of knowing you are part of a growing family. You will always be able to pick up the phone and ask questions to the franchisor or even to other franchisees.
- Marketing
There is usually no need to worry about advertising your franchise other than in your local area as the franchisor usually takes care of handling all the national marketing. If the franchisor does not handle the marketing, they will have an outline for you to follow and sometimes specific vendors that will have systems in place for you to use.
- Exclusivity
When you buy a franchise, you are also buying exclusivity in which to do business. Franchisors will only allow a certain amount of franchises to be open within a certain geographical region. You will be entitled to a certain area and no other franchises (within your franchise system) can be open within that area and in some cases, you may even have a territory or area defined by a map.
- Multi-unit franchise ownership
Being a part of a franchise system will always offer you more opportunities to grow within the system. Once you have become a successful franchise owner, the next step is to become a multi-unit franchise owner.
After you have one successful franchise open with a great management team you can focus time on opening a second location. Multi-unit franchise owners manage more than one location and can sometimes double their income by taking on more than one location. Owning multiple franchise locations can be very lucrative.
Steps to Take After You Choose Your Franchise
Once you have chosen which franchise is right for you, your job has just started. The process of investigating and buying a franchise should be done very carefully.
Do Your Homework
Research the history of the franchise and the franchise company via the Internet. Try searching for press releases on the company. Even though a franchise may have a popular name, there may be some issues that you may not be informed about. If the company has been in existence for five years or less, it is wise to pay special attention to the pace of growth and its franchisees’ geographical locations.
Find out how many franchises were opened during the last several years as well as how many, if any, have closed. Determine if the franchise has been growing at a reasonable pace so that you can get a good idea of the stability of the operation. Also, talk to other franchisees, including former ones, to find out how happy they have been with the franchisor.
Overall, if you take your time and do thorough research before making your investment, you will ensure you are making the right decision in choosing the right franchise and one that best suits you.
Kevin Bugeja, Managing Director
Franchise 4 U
Phone: 0412511630
Email: kevin@franchise4u.com.au
