A Franchise Business Is More Likely to Succeed Than an Independent Business

You Get Technical, Marketing and Other Know-how from the Franchisor

Some studies report that while a franchise business has an 80 per cent chance to succeed, the same percentage of independent businesses fail. While the percentages might vary, franchise businesses definitely have better success potential.

This is not surprising because under the format franchising model, franchisees receive complete business know-how. The know-how is not confined to technical know-how but also marketing and day-to-day operations know-how.

In this article, we look at the different issues that concern a franchisee.

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What Is a Franchise Business?

The term franchising has been used to mean different things like dealerships or licensing a production process. These days, however, franchise business means business format franchising, i.e., transferring a total way of doing business. A franchise involves two parties, the franchisor and the franchisee.

The franchisor is an established business that has developed successful and proven:

• Technology for making a product or rendering a service
• Ways of operating that meets customer convenience and preferences
• Marketing techniques that brings business in good volumes
• Training methods to equip operating personnel with requisite skills, and
• Ways of managing the whole establishment at each location

The franchisee is typically a local businessperson who brings into the business:

• Familiarity with local conditions
• Local contacts
• A willingness to work hard to make the local operation a success

The franchise business thus seeks to combine a proven business model, local knowledge and individual hard work.

Franchise Arrangements

In the developed countries, franchisors are obliged by law to give you full documentation about the franchise agreement in advance. Review it thoroughly to understand:

• What exactly would the franchisor provide you; and
• What would be your obligations and rights under the agreement.

Typically, franchisors provide

• The right to use a well-known brand name,
• Layout and decor of the premises,
• Equipment,
• Training in production processes,
• An operating manual with specific and detailed instructions,
• Promotional materials,
• Campaign participation and
• Ongoing support.

In return, your franchise business would typically

• Pay an initial price,
• Pay ongoing royalties, and
• Agree to be bound by the franchisor's way of carrying on the business. For example, you might have to follow the Quality, Service and Cleanliness standards laid down by the franchisor.

Precautions Before You Sign on the Dotted Line

Check out your obligations to purchase supplies from the franchisor or other nominated suppliers. Are the prices competitive? And what fees do you have to pay for promotional support?

You should also check the clauses relating to termination of the franchise, and your rights regarding sale or assignment of the franchise business if you decide to do so. Also, what happens to the franchise if you die?

Insurance coverage is another matter you should check. What types of cover are required? What are the arrangements for taking out the insurance?

Franchise Success

• Assess Local Market: Is there a sizable enough local market for the product or service offered under the franchise? If the market is too small, even the best quality product/service and superb promotional techniques might not be enough to generate profitable volumes of business.
• Selecting the Franchisor: In the Franchise Arrangements section above, a typical franchise arrangement is outlined. How well does your proposed franchisor come up when checked against these arrangements? How reputed is the franchise? How well are other franchisees performing?
• Negotiating with the Franchisor: Understanding the proposed franchise contract, and negotiating any terms that appear unfavorable to you, are also important. This is best done in consultation with your business attorney. There are words and usages which might appear insignificant, until you have to go to a court of law. For example, do you know that a 'hold harmless clause' in the contract could make you solely responsible for any breaches of local state laws?
• Marketing: Would you be able to comply with the marketing requirements under the franchise arrangement? For example, can you find spacious enough premises at the kind of location suggested? Look at the marketing techniques and how effectively they can be implemented locally.
• Operations: Check that you would be able to comply with the operational requirements like quality maintenance. Compliance with local government regulations is another issue that you should check.

Franchise Information Sources

There are several sources to help you locate a suitable franchise. In the US, the Department of Commerce publishes a franchise opportunities handbook. You can also contact SBA, BBB, local Chambers of Commerce and other agencies.

There are also franchisors' organizations like the following:

• International Franchise Association
• British Franchise Association

Return to Section Main Page Small Business Ideas and Opportunities

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