Pros and Cons of Franchise Businesses
Franchising is an innovative marketing technique for the improvement and expansion of products and services distribution.
History
A number of factors have been involved in the success of franchising. During the 1980s, recession created an unusual situation; people were being made redundant from their jobs and in many cases given large redundancy payments. Being too old or overqualified were just some of the reasons why those people found it difficult to get further employment. To start their own business was considered too risky, they only had the one sum of money so they had to minimise the risk. Franchising was the answer, a tried and tested formula was the safest bet. The government's recognition of the importance of small businesses and the rapid growth of the fast food industry were also major contributions to the success of franchising.
How Does it Work?
The principle of franchising is that a successful company wishing to extend its field of trading sells you, the franchisee, the right to use its name, experience and reputation. There are no hard and fast rules; the diversity of business makes that impossible. There are two basic types:
1. retail and catering
2. services, such as drain cleaning, carpet, furniture and house cleaning and car repairs.
Big name franchises can open doors, for example the banks are more likely to listen to a tried and tested formula. Sometimes the franchisor will lease or mortgage the property to you, but there are always systems that limit the way in which you are able to trade.
The British Franchising Association has produced a guide, An Introduction to Franchising (URN 96/999), which can be obtained from the DTI Small Firms Publications, Admail 528, London SWlW 8YT. Tel: 020 7510 0169, fax: 020 7510 0197.
An important fact to keep in mind when considering the purchase of a franchise is that, if the parent company is a successful household name such as Wimpy or Kentucky Fried Chicken, there will be a number of applicants and the purchase price is likely to be high. The franchisor will require references from you and you will require details of pilot schemes run by the franchisor.
The Contract
Professional advice is advisable throughout the negotiations and in particular at the contract stage. Your legal advisor will scrutinise the contract and highlight areas of risk or clauses that require clarification. Your accountant will check the figures and may even come across costs to you that are negotiable.
Main Points of the Contract
1. The cost of the total franchise package.
2. The length of time the franchise will run.
3. The type of business and operating conditions.
4. The franchise operation address.
5. The franchisee's rights to sell the franchise.
6. Contract termination by the franchisee or the franchisor.
A franchise is a fashionable way to start in business and reduce the risk. However, there are pros and cons:
Advantages
- You are trading under the umbrella of a household name.
- You will benefit from local and national advertising.
- Training is given in all aspects of running your franchise correctly.
Disadvantages
- There is always a franchise fee.
- There are always start-up costs, often quite large.
- There are management fees throughout the length of the contract - the norm is around 10%.
