Is Your Startup Business Worth Franchising?
There are Many Advantages of Franchising Your Business, Find Out How to Determine Which Franchise Business Is Best for You
Influential voices often like to say that we are living in a golden age of startups, and they are not far off the mark. Although starting your own business and taking the ownership over your career has never been completely devoid of troubles, it’s hard to deny that coming up with viable ideas and reaching out to investors has never been easier.
Lost in this interesting conversation is the concept of franchising – an option that allows you to start a company without having to build it from scratch. A shame, because this might just be the most approachable way to entrepreneurship for absolute newcomers without any previous business experience.
That is why we are going to take a look at some of the benefits of franchising and see what steps you can take to find the right fit.
The benefits of franchising
The word franchising describes the type of agreement in which the franchisor grants another party (franchisee) the right to use its brand as well as some of its business processes and infrastructure. This simple setup produces a surprising number of interesting advantages for franchisees.
- An established business model – Businesses that have come to the point of franchising have already passed all the common tribulations. By becoming a part of their network, you are becoming a part of a recognized brand that already has an established market presence.
- Open for newcomers – Running a franchise usually doesn’t require previous entrepreneurial experience. Responsible franchisors are there to provide all the necessary training you need to operate within their business model.
- Easy ways to get the financing – The investors are usually much keener to support businesses with established background and reputation rather than largely theoretical startup concepts.
- Strong success rate – According to the U.S. Commerce Department, fewer than 5% of franchises are terminated on an annual basis. Looking at these numbers from a different viewpoint, we can see that the success rate of new franchise businesses amounts to rock-solid 95%.
- Developed infrastructure – Franchise networks have already established infrastructure and resources (e.g. marketing assets and supply network) you can use to advance your own business.
Of course, there are some drawbacks as well. The most common critique regarding franchising as a model are the restrictions that are enforced upon franchisees by the franchisors. Still, these limitations don’t look too severe from the perspective of entrepreneurs that simply need a reliable business model to work with.
Now, let’s take a look at some of the ways you can properly identify the franchises that suit your business sensibilities.
Research your affinities
And we are not talking about general sensibilities.
We are talking about the specific, relevant skills you can use to run your franchise start up. Here, it is important to put your emotions aside and take an honest look at your chances of succeeding in certain industries as well as consider the options of outsourcing some of the business branches that are not within your expertise. Once you get through these cold calculations, you can start accounting your personal emotions toward different industries.
Research the market
The fact that some franchises are operating successfully doesn’t necessarily mean they are in need of further expansion in your area. That is why, before you make any knee-jerk reaction, you should do thorough market research to determine the local demand for franchise products/services and the vicinity of competing businesses and rivaling franchisees. Also, don’t hesitate to bring matters to the consumer level and inquiry your friends regarding their feelings toward the considered franchises.
Review the FDD
The FDD stands for Franchise Disclosure Document, a piece of writing that covers three very important topics:
- Past of current litigation – These items will tell you about the franchisor’s previous experience and eventual past bankruptcies – the topics important for determining the franchisor’s credibility.
- Payments and revenue model – The items describing your financial obligations toward the franchisor pre and post opening. Of course, some revenue models are more favorable than others.
- Turnover and resource strain – The list of currently operating franchises and the ones that have exited the network. All of them should be contacted for the purposes of the gathering of additional data.
Consider the support system
We already mentioned that franchisors usually provide a certain level of training and support to franchisees. To which degree depends largely on the franchisor. Some up and coming entrepreneurs prefer arrangements in which they have greater freedom to develop their startups. Others need stronger support to set the foundations. Whichever of these two models you prefer, though, you need to make sure that the franchisor has an established support system in all business-relevant fields.
Think about your long-term goals and exit strategy
Although they score a strong success rate, franchise businesses are not infallible or irreplaceable.
Before you contractually obligate yourself toward a certain brand, try to take into account how the revenue you are going to make fits into your long-term plans. If they don’t provide sufficient support for future ventures or allow you to devise a solid exit strategy in the case of the franchise failing, you should probably consider other options.
How much money you want to invest
Finally, you have to take a close look at your startup capital to get a clear picture of what your franchise opportunities actually are.
Businesses that seemingly offer low startup costs may require high maintenance which can potentially damage your turnaround in the long run (e.g. inventory and the cost of retail properties). As a result, you will need to rely more heavily on the investors and potentially even damage your credit score, which is an outcome you should, by all means, avoid.
In the end, we can conclude that franchising provides an excellent opportunity for all aspiring and inexperienced entrepreneurs to make their first career steps, but only as long as it is suited to their financial background and business sensibilities. Also, this particular type of agreement may put too much restraint on free spirits.
Still, no business venture is without its challenges, and keeping in mind all the benefits franchising offers, this option should be strongly considered if you lack previous entrepreneurial experience.