Franchise

Discover The Benefits And Pitfalls Of A Low Cost Franchise

Franchising is already big business in most countries.

It's also a very secure way to set up in business.

Only some l0% of a franchise business fail, compared with around two in three startups.

But statistics can be very misleading.... There are two main reasons why a franchise business is more secure, and you can make your own startup equally secure

To understand the statistics, start-ups include all kinds of "desperate attempts" - people who have fled from executive jobs, and who try to set up a business without reducing their expensive life styles.

Others are just compulsive gamblers, setting up one business after another, permanently in debt, or getting caught out by the Revenue. This "disaster' group is screened out of franchising in the selection process, but it has a distorting effect on the casualty figures for small businesses in general.

A second group could be called "uncommercial". The people concerned have good skills, but take some time to work out how to convert them into profitable sales.

How You Too Can Succeed

As an entrepeneur, you are well aware oI the need for hard information, all the twists and angles that can make a simple skill a saleable skill.

In addition there's the highly effective counselling service provided by the enterprise agencies, and a huge array of "Start Your Own Business" training available on the internet.

Advantages of Franchises

There are still, however, two key advantages for franchisees:

1. Adequate finance: the franchisee usually gets full information on costs, and some realistic assessment of the time it takes to break even. Very often a good finance "package" is provided, givinq him up to two-thirds borrowing power.

2. Experience: the good franchisor provides tremendous "know-how" in the acquiring of premises, the choice of raw materials, the cost of alls upplies, the required level oI sales target, and tested accounting system, plus, in the event oI a problem or slow sales, someone from head office who will be there to give advice.

Call it "hand-holdinq" if you like, but if it makes you more money in less time, why worry?

The Pitfalls

I have given you some pretty convincing arguments for the benefits of franchising, but I still stop far short of advising you that "franchising is best".

Take care. Here is the other side of the coin.

My comments on experience are directed at the most efficient and successful franchising operations.

Like every other field of fast growth, there are two-bit companies jumping on the bandwaqon, and they can put on a very convincing front.

These are the points to watch out for:

l. How long has the company been running the franchise, and what previous experience do they have in the business?

2. How many outlets do they have? You should receive a list of them to coroborate the claim.

You also need to check how successful exist ing outlets are. Visit one or two if possible.

3. If youare considerinq putting your own prospects for success in the hands of a franchise company, it is quite proper to show caution.

Ask about the directors, ask for references, and ask to see the department administering the financial returns and accounting systems.

Dont accept bland assurances of "onqoing support" - check out what this amounts to in practice, because you'll be paying for it.

Who Benefits?

What's in it for them? Suppose a company called "Grabbit and Run" decides to sell franchises. If they wanted to be greedy they could ask for a total financial commitment of 90% for franchisees to have fully fitted shops. They could then sell you their product at 100% profit, and insist in the contract lhat you must not obtain stocks elsewhere. They then ask for 25% of your tumover in royalty with another l0% as a part of their "marketing fund" which disappears into their profits without more than a tiny fraction actually being spent on advertising or sales support. A

s a further refinement they might well insist on holding the lease on the premises themselves. (they can then sell it or increase the rent) and they can set a five-year limit to the period of your franchise, so that they can whack up the finance fee on renewal.

In some Franchise contracts you can also see that a large proportion of the money you can get on selling a successful business could be "creamed off' by the franchisor.

This is an extreme and fictitious case, but it does illustrate the pitfalls. To be fair, there's many a brilliant franchise idea which has failed, due to the poor quality or the services of its franchisees.

Good Signs To Look Out For

It's a good sign if the franchisor has a tough selection process to sort out the most suitable franchisees.

If the prospectus is short on facts, sketchy about the cost of everything, and the inteviewers are falling over themselves to get you to sign an enormously detailed contract, you would be well advised to wonder whether you re being "had".

If the line they take is more positive, with detailed examination of whether or not you have the qualities they are looking for, with qreat emphasis on training and regular courses to improve business, you can be reasonably sure they need and want you to succeed.

Whatever the style adopted, you mu6t go through the projected sales and profit figures with a fine tooth comb.

Remember that your pre tax earnings come way down at the bottom of a long list of costs.

What happens if you sell less than the monthly forecast suggests?

What if they double the price of some essential supply?

Ask to see the real records of some existing franchisees, just to check whether other people have found the sales targets possible to achieve.

In a good franchise you quickly get the feel of a lot of know-how and consideration to detail.

One of the best yardsticks to use when you make your final selection is "how much would it cost me to start this up on my own?"

If so, you may find that you could do it more cheaply, as well as saving money on the royalty payments.

A determined entrepeneur can certainly make more money and have a much simpler business to sell, if he or she sets up on their own with appropriate caution.

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