Just like any business, some franchise businesses will be highly profitable; some will fail along the way, while others will outrightly fail.
Whether a particular franchisor is thriving or not, doesn’t mean that you’ll succeed or fail as a franchisee under them.
Like any stock investment, you have to do your research well before becoming a shareholder. Franchising demands that you examine its likely benefits with caution first.
Whether you intend to invest in a small or a major franchise, the reasons in this post will offer you the best encouragement you need. They include:
Investment Flexibility
Franchises are available in almost every industry and come in different sizes. Starting from the small investments that you can work on part-time at home to bigger investments that you can work on with a team of employees.
Franchisor’s Recognized Brand
Franchisors own intellectual properties that include their brand. So operating under them offers you access to their properties. Meaning in case they’re a recognized brand by the customers, you get instant access to the customers.
The prospects will acknowledge your offer even before you are deep into the investment. This is among the major reasons you should invest in a franchise.
Advertising
Normally, franchisors publicize each new franchise’s take-off, creating an impression on the local market. All the marketing tools and advertising campaigns are offered to the franchise. Both locally and nationally, to facilitate the publicizing.
Avoiding First-Time Mistakes
Each business makes mistakes in its initial stages. The mistakes range from choosing a bad location, coming up with the wrong products or prices, and not comprehending the business cycles.
Fortunately, all the above mistakes were done and remedied by the franchisors before for a franchise. And the business was refined through experience. So working under them means you can’t make the same mistakes they made before perfection.
Specialized Training
As a franchisee, all the training you require before and during the investment is catered for by the franchisor. You get trained on the best ways of doing the business. And if your investment is big, your main staff will always be trained too. This helps to prevent most headaches that come with a lack of training.
Continuous Support
Just like the preliminary training offered to them before the business kick-off, franchisees also get continuous assistance from franchisors. This comprises head office visits, free phone lines, and company intranet connections.
The support ensures that the franchisees are always updated, their problems are solved, and they get the necessary advice regarding pertinent issues like changes in financial and technological advances.
Advantageous Location
Naturally, a franchisor will help a franchisee choose a favorable location capable of balancing substantial customer traffic with cost-effectiveness. Additionally, they ensure that there aren’t other franchisees already working in your region because they are always aware of the competition in the local market.
Product Availability
Often the franchisor gives some or all of the commodities to be sold. This makes it much easier for the franchisee to access the products, which is a big advantage if the franchise is retail. Otherwise, centralized buying should be a feature, with a lot of goods being bought by a group of franchisees, enabling them to consequently get bulk discounts.
Lower Risks
Franchises always lower the risk of failure, which means that investors such as banks will be more willing to loan money to franchisees. Because franchisors always have particular agreements with specific banks to offer funding alternatives. Occasionally the franchisors do loan money, and there’s a possibility of qualifying for government loans or grants.
Easy to Sell-Off
Given all of the above resources, wanting to sell your franchise might seem unimaginable. However, there might come a time when you wish to do it. A franchise often has a rosy market, but your franchisor should be capable of lining up an alternate quite fast. This will save you the hustle of looking for a buyer personally.
Franchise FAQs
Here are the commonly asked questions about franchises.
What is a Franchisor?
A franchisor is a business or corporation that licenses the right to operate in its name and sell its products or services using the franchise’s branding, assets, and intellectual property. The advantage to becoming a franchisor is that franchising allows a business to expand its locations and size more quickly and more successfully by relying on franchisees to use their local market knowledge to grow the business.
What is a Franchisee?
A franchisee licenses the right to do business under a franchisor’s brand using the franchisor’s operational processes. Franchisees receive access to the franchisor’s proprietary knowledge, systems, and support while being held responsible for maintaining the same brand and quality standards as the franchisor.
The advantage to becoming a franchisee is that the costs of opening a franchise are often lower compared to starting a company from the ground up, and the franchisee inherits the proven, established business model and brand as opposed to starting a new one.
What is the FTC Franchise rule?
The FTC Franchise Rule is a federal regulation that requires franchisors to prepare an extensive disclosure document and give a copy of this document to any prospective franchise purchaser. The disclosure document typically used to comply with the Rule is called a Franchise Disclosure Document (FDD), which replaced the prior Uniform Franchise Offering Circular, or UFOC, in 2008.
The Franchise Disclosure Document contains categories of information about the franchise’s operations such as required fees, basic investment, bankruptcy and litigation history of the company, how long the franchise will be in effect, a financial statement of the franchisor, and earnings claims.
What are the most Franchised industries?
Franchises operate in virtually every sector you can imagine. In addition to a large presence in the restaurant and hotel sectors, the most commonly franchised industry categories include service-related fields such as:
- Home repair and remodeling
- Carpet cleaning
- Household furnishings
- Maintenance and cleaning services
As well, franchises are commonly seen in business support services such as:
- Accounting
- Mail processing
- Advertising services
- Package shipping
- Personnel services
- Printing services.
Other commonly franchised industries include:
- Automotive repairs and services
- Environmental services
- Hair salons
- Health aids and services
- Computer and phone repair
- Clothing stores
- Children’s services
Is a Franchise a good way to start your business?
There are typically three paths to going into business for yourself: starting a new business, buying a new franchise, or purchasing an existing franchise. Each option carries pros and cons, which we have outlined below.
To summarize, starting your own business can be a more affordable, flexible option, but often requires significantly more effort and carries a higher risk of failure. Purchasing a franchise comes with the significant brand and business support from the franchisor, although your costs are generally higher and you cede some operational independence to the franchisor.
What should Franchisees know about a Franchisor’s financials?
Financial statements represent the financial track record of your franchise and tell you how well-positioned your franchisor will be for the future. They are provided for you in the Franchise Disclosure Document (FDD) and contain important information about the franchisor’s financial status and strength.
The two most important franchisor financial statements franchisees need to review are the Balance Sheet and Income Statement.
The Balance Sheet
A balance sheet is a snapshot summary of how much a company is worth on any given day. It reports the financial condition (solvency) of the franchisor.
Balance sheet categories include:
- Assets – what a company owns: current, fixed, and intangible assets.
- Liabilities – what a company owes: current and long-term debt.
- Stockholders’ equity – the company’s net worth; it is the money the company has taken in from the sale of stock plus any accumulated profits:
Stockholder’s Equity = Assets – Liabilities = Net Worth
Things you want to see on a franchisor’s balance sheet:
- Increasing assets
- Increasing stockholders’ equity
- More cash than debt
- Amount of current debt < (less than) 1/2 of the total assets
- Amount of current debt < 1/3 of the stockholders’ equity
The Income Statement
An income statement reports a company’s profit or loss. It shows a company’s income, expense, and net income – also known as the “bottom line” or earnings.
Other names for an income statement include:
- Profit and loss statements
- Statement of income
- Statement of operation
- Statement of earnings
- Results of operations
- Statement of consolidated income
Income statement categories include:
- Revenues
- Costs and expenses: cost of sales, selling, general administrative, interest expenses
- Income before taxes
- Provision before taxes
- Net income (earnings)
- Net income (earnings) per share
Things you want to see on a franchisor’s statement:
- Increasing profit
- More revenue is derived from royalties and system income than from selling franchises
- Increasing revenue trends, usually > 15%
- Increasing net income trends, usually > 15%
- A profitable franchisor!
What you should know about these financial statements:
- The financial statements should be audited financial statements.
- The statements should contain three years of financial data (unless the franchisor has less than 3 years of operating history).
- You should take these to an accountant experienced in franchising for evaluation.
What criteria should I use when assessing a Franchise opportunity?
Before purchasing a franchise, we recommend carefully considering the items in the eight categories below that will be critical to your success:
Costs
How much money will this franchise cost before it becomes profitable?
Can I afford to buy this franchise?
Can I make enough money to make the investment worth my time and energy?
Demand
Is there enough demand in your area for the franchisor’s products or services?
Is the demand year-long or seasonal?
Will the demand growth in the future?
Does the product or service generate repeat business?
Brand Name
How well known is the franchise name?
Does it have a reputation for quality?
Have any consumers filed complaints with the local Better Business Bureau?
Experience
- Has the franchisor been in business long enough to have established the type of business strength you are seeking?
Your Abilities
Do you have the technical skills or experience to manage the franchise?
Do you have the business skills to manage the franchise?
Competition
How much competition do you have, including other franchisees?
Are the competing companies/franchises well established?
Do they offer the same products and services at the same or lower prices?
Is there a specialty or niche you can capture?
Training and Support
What kind and how much training and support does the franchisor provide?
Do existing franchisees find this level of training and support adequate?
Expansion Plans
- Is the franchisor planning to grow at a sustainable rate?
What is a strategic alliance?
A strategic alliance is an arrangement between two franchisors to form a mutually beneficial business relationship while still retaining their independence. While similar, it is less binding and more flexible than a joint venture agreement, which would create an entirely new business between the two entities.
The potential benefits of a strategic alliance include expanding into a new market, expanding a product line, or developing a different advantage in the market. The arrangement helps two franchisors work toward a common goal and can benefit both parties in the same way or diverse ways, but equally.
How do I make my Franchise successful?
Making any business reach its full potential takes talent and hard work. If you’ve selected your franchise well, your franchisor will be able to help you avoid many of the mistakes new, independent start-up businesses make. Below, we’ve listed 10 keys for franchise success.
Make Sure You Have Enough Money.
Determine how much you have to invest, how much you’re willing to risk, and how much you will need to live on for at least 12 months.
Make sure you understand the initial investment required.
Make a careful and rational decision about buying the franchise. Listen to your attorney and accountant and do not be pressured by the franchise salesperson.
Follow the System.
Franchisees often get their business up and running and then begin to change, add or modify existing products, advertising, hours, services, and even the quality and consistency they are licensed to deliver. This violates the franchise agreement and puts you in jeopardy of having your franchise terminated!
By following the system, you:
- Preserve the brand
- Protect your investment and that of your fellow franchisees
- Don’t neglect your family and friends.
Be prepared to work long hours, but also make sure to budget time for your family and friends. Don’t forget to acknowledge the sacrifices your family makes.
Allow your family and friends to share in your new life.
Be An Enthusiastic Franchisee
The success of any business is linked to the level of enthusiasm you bring to the job. Enthusiasm brings a level of excitement and energy to the operation that everyone can feel-including your customers and staff. Let your staff in on the fun. Acknowledge their good work with recognition or a raise.
Recruit the Best and Treat Them with Respect.
Good help is hard to find and great help is essential.
To keep the good stuff you’ve hired:
- Rotate routine and boring jobs.
- Be fair. Don’t show favoritism.
- Work with your staff to develop the schedule.
- Treat your employees with respect. Don’t allow employees to be disrespectful to any other employee.
- Keep employees informed of new marketing and other promotions.
- Remove hassles-ask employees which procedures are working and which aren’t.
- Make their workdays challenging.
- Provide timely performance reviews and wage salary increases.
- Teach your employees.
In franchising, training should be continuous. Employees are your front line. Training classes are a good way to show your employees that they matter to you.
- Get all the training you can from the franchisor and regularly train and retrain all your employees.
- Hold refresher and advanced classes regularly.
- Alert your franchisor when you need additional training.
Take advantage of every training opportunity, whether it’s offered by the franchisor or by local schools, trade associations, and other sources.
Give Customers Tremendous Service.
The most important thing you can do is to get everyone to smile!
Let the customer know you’re happy they chose your business.
Bottom Line
At the start of this post, you sought to know the top ten reasons why you should invest in a franchise. Having tackled that, you now have all the information you need to make an informed decision.
