Launching a franchise business can be highly lucrative.
According to one study, nearly one in every twelve businesses in the United States is a franchise. These businesses are expected to have contributed nearly 50% of all retail sales in the country.
Running a franchise business has its pros and cons. To begin with, franchising allows business owners to focus completely on running the operations without having to worry about other aspects of business like marketing, branding, employee training and production.
More importantly, franchising lets owners to not have to go through the teething troubles of creating awareness and getting customers to your store. That is already taken care of by the franchisor.
But running a franchise is not quite the piece of cake owners expect it to be.
For one, franchising can be expensive depending on the brand you want to establish. In addition to paying a franchising fee to acquire rights to using the franchisor’s brand name, you may also be required to acquire or lease real estate.
If you do not own the capital yourself, you must be prepared to acquire working capital loans (that often start out with interest rates of 9% or above).
The business model of a franchise revolves around your ability to procure real estate at a high footfall location and the franchisor benefits from running a store at such prime locations without the added operational costs.
The capital expenses do not end there. As a franchisor, you may also have to pay for equipment and training for each of your employees. All of these costs can add up quite dramatically making it an unattractive proposition.
Picking the right franchise
There are two ways to make sure that franchise businesses start turning a profit immediately. The first strategy is to pick a brand that is so well known in the industry that you will start seeing customers from day one. A good example for this is a brand like Dominos or Subway.
But making pizzas need equipment that is expensive to procure. So, the alternate strategy is to choose an industry with very low capital and relatively high margins. Travel agencies, currency conversion, etc. are examples of industries that need very little capital cost.
A word of caution here. Like it is with any business, high reward comes from higher risk. Setting up a franchise for pizza chains may be expensive, but is also rewarding since the brand takes care of offering exclusive territorial ownership.
On the other hand, low capital franchises may have fewer restrictions on territory rights. Consequently, you may face a higher level of competition in such industries.
As a franchise owner, there is only so much you could do by yourself. The success of your venture depends on how well your staff is trained. The most successful franchisors have sophisticated training modules that offer tested training sessions to each of the franchise employees.
As a matter of fact, it is a good idea to interview current employees of various franchises to understand the kind of training they undergo during the franchise selection stage itself. Picking a franchise business with a sophisticated employee training program could help you avoid headaches at later stages of your business.
Understanding your role
Running a franchise does not necessarily always mean that you do not have to worry about marketing and branding. While the challenges are not nearly the same, a franchisee spends a significant time on these areas of business anyway.
However, instead of having to come up with your own marketing strategies, you will be responsible for executing plans that come from HQ. In some ways then, running a franchise is like a salaried job without a definite salary at the end of a month.
It is important to understand this distinction since franchisees who fail to adhere to the branding and marketing guidelines as set by the franchisor could have their licenses revoked or risk being sued.
Buying an existing franchise
Given the capital costs involved in setting up a franchise and training your workers, it may seem like a good idea to buy an existing franchise.
This does come with a few distinct advantages.
Firstly, this does make the process more predictable. An existing franchise with a steady P/L and a trained workforce is easier to manage than setting one up from scratch. Also, such businesses come with fully setup processes and CRM processes that are easier to inherit.
However, such businesses may also be more expensive to buy into.
As a franchisee, you may have to weigh in the costs involved. Is it cheaper to buy an existing franchise with a steady P/L, or spend extra in training a fresh workforce in the operations? Ideally, a trained businessman would find it profitable to buy a failing franchise that can be turned around. Such businesses are cheaper to buy. However, unless you have experience turning around businesses, this is not really a good idea.
Scaling your franchise up
One of the biggest problems with a franchise business is that there is a limit to how much money you can make.
For one, franchisors have to pay a percentage of all their revenues back to the franchisor. More importantly, a business that is tied down to one location can only attract a finite number of customers. Scaling up will need a franchise owner to either acquire rights to more locations or work out other strategies.
There are two ways to scale a franchise business. One way to do this is by acquiring rights to one brand across multiple territories. This is especially advantageous in food based franchises that require each location to source products from a specified list of vendors.
By acquiring rights to multiple territories, you gain a better leverage with respect to procurement costs. This helps you improve margins and thereby earn higher profits.
Another strategy is to focus on multiple franchise businesses in one location. For instance, you could acquire franchise rights to multiple pizza chains in one neighborhood.
Customers tend to rotate among the various service providers in their neighborhood. By acquiring rights to these multiple franchises, you can expect to retain a customer (even if they switch to another business). Also, depending on what your franchise agreement says, you may also cross-promote your various businesses in one location.
Do you dream of running a franchise business? Share your thoughts and concerns in the comments below.