Franchising has proven to be a popular business model, especially among first-time entrepreneurs. Some people may think all they need to do when taking up a franchise is put up money for the franchise fee and setup costs, and then they'll be rockin' and rollin'. But before taking out your cheque book and emptying your retirement fund, there are some things about franchising that every prospective franchisee needs to know before jumping right in.
You Require More Capital For Starting Up A Business
Taking up a franchise does not allow you to put up less money for starting up a business. In fact, you are paying more. In addition to the setup costs involved for the business, you pay an upfront franchise fee to the franchisor. Let's not forget about the ongoing royalty payments (and maybe marketing contributions), which is based on a percentage of your revenue, due to the franchisor for the period of the franchise agreement.
You Are Not Taking Up A Risk-free Investment
In case you're wondering - no, the franchisor will not reimburse you for your invested capital if your franchise business doesn't work out. Perhaps at most, some franchisors are willing to buy over your machinery and equipment at market value or maybe even take over your whole franchise unit. But those decisions are entirely up to the franchisor. So if you're looking to get every dollar back, that's not happening.
You Are Not Totally Your Own Boss
When you set up your franchise business, you are your own boss in that right. However, franchisors require their franchisees to follow a certain system and overall corporate direction. Even if you do not agree with certain requirements, you are still expected to comply or most likely face legal consequences. You might want to review that decision to take up a franchise if absolute control is what you're looking for.
If taking up a franchise seems like a bad idea, how is it possible that franchising has grown to be such a popular business model?
When the franchisor accepts your franchise fee payment, they will provide support during the opening phase of your franchise business. Typically such support consists of franchise unit setup, training for operational and management staff, and marketing initiatives. Along with that, an operations manual will be provided for reference to processes should you or your employees forget what is the 'correct' way of doing things. With this transfer of knowledge, franchisees are able to have a not-so-steep learning curve and understand what makes the business profitable. All these to increase the prospect of you having a smother transition from business newbie to successful business owner.
Although guarantee of success is not promised here, what the franchisor does is put in place foundations that have been proven to be successful over time and this allows a reduction in unsystematic risk - uncertainty that is controllable by an organization and micro in nature. Perhaps some relevant factors here is with regards to supply chain (e.g. lower input costs through bulk buying) and strategic direction (e.g. changes in customer demand or new product development). So in a way, taking up a franchise allows you to have a lower level business of risk in comparison to setting up an independent business. Ultimately, success depends on your ability to operate a franchise and the amount of effort you are prepared to commit to the business.
On the other hand, royalty payments ensures you will receive ongoing support from the franchisor. In most scenarios, royalty payments will be used to fund an array of dealings such as adopting the latest technology, collective purchasing, updating operating materials, development of new offerings, ongoing training and mentoring costs. While the need for royalty payments may not be obvious at the start, it becomes perceptible over time that these payments could create a profitable outcome for both franchisor and franchisee.
As for control over your business, the major limitations you face normally relates to protocols for representing the brand professionally in your own franchise territory. Franchisors will want their franchisees to do well because it is an interdependent relationship; if franchisees do well, franchisors do well. That is why franchisors will insist franchisees have to implement a certain system - one that has already been proven to generate revenue. In fact, franchising does not stifle creativity because most franchisors actually encourage franchisees to suggest new ideas.