A franchised company is usually built on a proven business model, saving new business owners the time, energy and money. It can be a very attractive way for people to become business owners, but make sure you know the facts about franchising.
A franchise system is where a company develops a product or service that is successful in the market place and the systems and procedures necessary to make the operation of the business predictable.
Franchising is a way of doing business that is built on systems and procedures that systematises business operations. It's a method of distributing a product or service and a way of doing business based on a successful and proven business format for which money is paid, usually upfront and on an on-going basis, allowing for the use of intellectual property and for the continuous provision of appropriate training and support.
This BizConnect guide will give you an overview of how to buy and operate a successful franchised business:
Characteristics of a franchise system
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Universal brand and operating system
A successful franchise system is built on the premise that all units operate under a common brand and operating system. That's how the consumer knows that Nando's chicken is the same, whether they buy it in Johannesburg or East London. The franchise system ensures that every franchisee is doing business in the same way, and that every store is supporting and reinforcing the brand.
Ongoing support and training
Franchisors typically support franchisees in every area of the business. This usually includes ongoing contact with dedicated support personnel for marketing, staff training, technology and other aspects of daily operations.
Franchisees typically have a contractual commitment to pay the franchisor ongoing fees in exchange for the right to use the brand and operating system. These royalties enable the franchisor to pay for the staff and programmes they have in place to provide ongoing support to their franchisees. Royalties are either a fixed monthly amount or a percentage of sales.
In a franchise, legal requirements are stringent and will be contained in the Disclosure Document, which contains all the information about the company and the opportunity being offered. This must include the history of the franchise system, key employees, any litigation or bankruptcies, all fees and costs, all rules and restrictions related to the business operation and the audited financial statements.
Franchisee character traits
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Is franchising right for you? Here are some of the characteristics of successful franchisees:
- Ability to take risks - buying a franchise may be less risky than starting a business from scratch, but it does require courage and commitment. The responsibility for making the venture successful remains with you.
- Systems orientated - you must have absolute faith in the system you are investing in.
- Ability to follow rules - franchise systems are rules-based to maintain uniformity. You must follow the franchisor's operations manual, use their colours and logos, and adhere to the corporate image. If you like doing things your own way, franchising is not for you.
- Sufficient capital - the initial investment in a franchise may be a lot higher than the start-up costs of a small business. This is because the franchisor has a brand image to uphold. The good news is that it will generally take less time to break even.
Pros and cons of buying a franchise
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- Predictability through the use of a proven blueprint and coordinated systems and procedures
- Assistance in all aspects of starting up the business, for example, staff selection and training
- Joint advertising and promotion
- Bulk buying power through the franchisor
- Operational support through the franchisor's field staff
- Rigid operating procedures
- Potentially high set-up costs
- Reliance on the franchisor for major business decisions which could affect a franchisee's future earnings
- Susceptibility to a possible deterioration in the group's reputation
Top 10 franchise pitfalls
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Knowing why franchises fail can make a big difference in the ultimate success or failure of your franchise. Here are some of the most commonly cited reasons behind franchise failures:
- Ineffective franchisors. Beware of franchisors who are only in it to make a quick buck at your expense. Contact other franchisees in the system and ask as many questions as you need to ask to determine the viability of the franchise concept.
- Family business. Avoid franchise systems that employ lots of family members. A good franchise company needs highly skilled and seasoned management.
- Unstable concept. If the franchise model is new or constantly changing, beware. It may simply be unworkable.
- Compliance rules. If the franchisor does not listen to franchisees' feedback, it may become impossible to work in the system.
- Does the franchise company run a collaborative environment in which its employees listen to franchisee concerns, or is it a bureaucratic nightmare demonstrating low concern for franchisee results and relationships? The franchise company doesn't get to answer this question. You need to seek out a number of franchisees and hear what they have to say about the relationship.
- Inadequate start-up capital. It may take up to three years before you really see how much money your franchise will make. But too many new franchisees don't think that far ahead and fail to plan accordingly. Lack of funds has doomed many a franchise.
- Poor location. Location is everything when it comes to business. A highly-recognisable franchise will still fail if it is hidden away from the view of its target market. Place your franchise in the best spot you can afford.
- Market saturation. Small territories are restrictive. You also have to take into consideration other similar business in the area. Consider setting up in a different area, or buying into a different industry altogether.
- Inadequate promotion. Brand recognition alone is not enough to promote a business. Make sure you have your own marketing campaign.
- Inflated expectations. Many franchises fail simply because their owners have unrealistic expectations. Like any other small business, it requires hard work, dedication, and lots of time before you can reap the profits.
- Lack of motivation. If for any reason the franchisee loses motivation to succeed in the franchise then it is unlikely that the business will be successful. A genuine burning desire to succeed will overcome many problems.
How to succeed in franchising
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- Choose a product or service you care about. Consider hiring a consultant to analyse whether you are a good fit for the business opportunity you are thinking about buying into.
- Couple passion with discipline, avoiding too-fast growth at the expense of high-quality expansion.
- Among the most common mistakes new franchisees make, is signing on before adequately researching the business properly.
- Contact current and former franchisees to get their feedback, using names from the franchise circular from the franchisors. Never make a commitment based solely on information provided on the Internet or over the phone.
- Pick a franchise system with a long track record.
- Think carefully about location and look at the local population characteristics, income levels, lifestyle trends and traffic patterns.
- Pay attention to customer service and customer experiences.
- Be prepared to be an owner-manager. Your chances of success will be far greater if you are closely involved in the business on a daily basis.
- Winning franchisees treat employees well, so they will treat customers well. Making sure employees are properly trained and working in line with the rules is vital.
- Follow the rules. Franchises aren't designed for the independent-minded. They depend on a by-the-book execution of a business plan, adherence to proven systems, and a willingness to follow directions.