by Stacey Hubbard

Created on: March 06, 2011

Franchising

One business idea that has previously been mentioned within this blog is franchises. For some entrepreneurs the prospect of thinking up a business entirely on their own is very daunting so they prefer to pay someone else to allow them to use theirs, this is basically what happens within a franchising agreement.

What is a franchise?

A franchise is when one business (known as the franchisor) sells the right to use and sell its products and or services to another business (known as the franchisee). These businesses will the sell the product and or service under the franchisor’s name, existing well known franchises consists of McDonalds, Starbucks and Burger King.

What are the benefits of operating as a franchise?

There are benefits to both the franchisee and the franchisor for operating as a franchise, for the franchisee these are they are provided with the equipment to start the business, there will already be a customer base for the business as it will be associated to an existing brand name, the individual won’t have to start the business from scratch as it is already set up, the franchisee will receive training and ongoing support as well as from marketing done by the franchisor. The benefits for the franchisor are the business will be able to grow quickly, they will be known in a wider area geographically, it is fairly low risk and they will benefit from the growth of the business.

What are the disadvantages of operating as a franchise?

With anything there are advantages and benefits to doing there are also disadvantages and drawbacks this is the same for operating as a franchise. The disadvantages to the franchisee of operating as a franchise are there a specific and restricting contracts the individual has to comply to, there is a large franchise fee and other expenses for the franchisee to pay, the individual is the one who takes the risk, if the franchise fails the individual fails and there is the possibility of losing the franchise if this is to happen. The disadvantages for the franchisor consist of having to provide the equipment to the franchisee and the cost of doing this, having to train the franchisee and the cost of doing this, they may gain a bad reputation if the franchisee does something wrong, and the business may grow too quickly.

How much should you pay for a franchise?

When buying a franchise there a several different types of payments involved, these can include an initial purchase fee, plus a percentage of the turnover each year. As well as there may be money that the franchisee has to invest each year to cover marketing and management costs. The amount you as the franchisee has to pay will depend on several things, these are the expected turnover of the business, the typical profit margin, the amount of training and support that is offered and provided as well as whether the franchisee has individual rights to a specific geographical area, if this is the case how big the area is and how ‘attractive’ it is.

Conclusion

If you are looking to start a business and become an entrepreneur, a franchise is definitely one of the options. There are many advantages but with these also come the disadvantages, so these need to be properly investigated to see if the rewards and benefits outweigh the drawbacks. It is also a good idea to remember that the rewards do have to be shared.

Think, do the benefits of buying an established idea, support and training outweigh the costs and restrictions of doing this?

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