Buying a Franchise
Buying a Franchise
a) Start a business from scratch.
b) Buy an existing business.
c) Buy a franchise.
Buying a franchise is generally an expensive option, but mostly a safer option.
Let's first look at what is a franchise. Someone has started a business and it is running very successfully. He decides to expand the business. He now has two options, open another branch by hiring premises, staff, buying the equipment, etc., or franchise his business.
To open another branch means high initial overheads and the problems associated with managing staff from a distance, but it can bring in just as high an income as the first branch. If he decides to franchise, then the franchisee (person who buys the franchise from him) will take most of the profit, but the franchisor (person selling the franchise) doesn't have lay out the initial expenses and receives a smaller, but steady income from the franchise.
Why would you want to buy a franchise and why is a franchise more expensive?
Firstly the franchisor charges you a sum to set up the business. This sum normally includes the actual costs of setting up the business, initial marketing of the business, training in how to run the business, the right to use the franchisor's intellectual property, the advantage of the good will associated with the business and of course of profit for the initial services provided by the franchisor. Most of this makes sense except the intellectual property and good will bit. Buying the right to Intellectual property (IP) is buying the right to use the franchisor's name, logo, slogans, knowledge, systems, etc. Good Will (GW) is the amount of public recognition the brand has, eg., the better the product is known, the more likely the public will make use of it / buy it. If you now start selling that product, you will automatically get people that come in to buy it. You have thus profited from the good will of that brand. A well known brand like KFC charges a huge amount for IP and GW.
It is these costs that push up the initial price of a franchise. The advantage behind that initial cost is that you save way more than the price you paid in branding. Let's stick with the KFC example. If you start your own roast chicken business from scratch, you will have to spend huge amounts telling the public about your product. This doesn't only cost a lot, but it also takes time. People are creatures of habit and afraid of change. They would rather drive across town to buy a product they know than try a product nearby. This is why many companies hand out samples, this way the customer can try the product without spending anything or going out of his way to try it.
If, however, you pay ten times more for a KFC, you can be guaranteed that the customers will be lining up at your door on opening day, simply because they already know & love the product.
So here we have the first point to look out for when buying a franchise : Is the franchise established or not, and how does that reflect in the initial purchase price.
Many people try and franchise their businesses, the problem is that many of these businesses are not even established themselves yet. Most businesses fail within their first three years. If you are buying a franchise where the entire business hasn't even been in existence for 5 years, you are taking a huge gamble. That business could collapse at any time and take you with it. If the business has been running for 5 or more years though, then it could be a good proposition. If the business has been running for more that 10 years, then it probably is a good proposition.
Beware of franchises that are charging high initial start-up costs and low, or no, monthly royalties. Chances are these guys know that the business doesn't make much money so they have to make their money up front. Also beware of franchises that charge high monthly royalties. The worldwide standard is around 13% of turnover or less. Anything more and you will be living on the bread line while the franchisor is coining it. A franchisor that cares more about his franchisees and the business as a whole will charge a lower royalty (6% to 10%) as he knows he has a good business where the franchisee can make a good living, while he can also make a good living from many franchisee's royalties.
Buying a Franchise - To learn more about this author, visit Nolan Clark's Website.
Like this article? Share it with your friends
When starting a business, you have three main options :
a) Start a business from scratch.
b) Buy an existing business.
c) Buy a franchise.
Buying a franchise is generally an expensive option, but mostly a safer option.
Let's first look at what is a franchise. Someone has started a business and it is running very successfully. He decides to expand the business. He now has two options, open another branch by hiring premises, staff, buying the equipment, etc., or franchise his business.
To open another branch means high initial overheads and the problems associated with managing staff from a distance, but it can bring in just as high an income as the first branch. If he decides to franchise, then the franchisee (person who buys the franchise from him) will take most of the profit, but the franchisor (person selling the franchise) doesn't have lay out the initial expenses and receives a smaller, but steady income from the franchise.
Why would you want to buy a franchise and why is a franchise more expensive?
Firstly the franchisor charges you a sum to set up the business. This sum normally includes the actual costs of setting up the business, initial marketing of the business, training in how to run the business, the right to use the franchisor's intellectual property, the advantage of the good will associated with the business and of course of profit for the initial services provided by the franchisor. Most of this makes sense except the intellectual property and good will bit. Buying the right to Intellectual property (IP) is buying the right to use the franchisor's name, logo, slogans, knowledge, systems, etc. Good Will (GW) is the amount of public recognition the brand has, eg., the better the product is known, the more likely the public will make use of it / buy it. If you now start selling that product, you will automatically get people that come in to buy it. You have thus profited from the good will of that brand. A well known brand like KFC charges a huge amount for IP and GW.
It is these costs that push up the initial price of a franchise. The advantage behind that initial cost is that you save way more than the price you paid in branding. Let's stick with the KFC example. If you start your own roast chicken business from scratch, you will have to spend huge amounts telling the public about your product. This doesn't only cost a lot, but it also takes time. People are creatures of habit and afraid of change. They would rather drive across town to buy a product they know than try a product nearby. This is why many companies hand out samples, this way the customer can try the product without spending anything or going out of his way to try it.
If, however, you pay ten times more for a KFC, you can be guaranteed that the customers will be lining up at your door on opening day, simply because they already know & love the product.
So here we have the first point to look out for when buying a franchise : Is the franchise established or not, and how does that reflect in the initial purchase price.
Many people try and franchise their businesses, the problem is that many of these businesses are not even established themselves yet. Most businesses fail within their first three years. If you are buying a franchise where the entire business hasn't even been in existence for 5 years, you are taking a huge gamble. That business could collapse at any time and take you with it. If the business has been running for 5 or more years though, then it could be a good proposition. If the business has been running for more that 10 years, then it probably is a good proposition.
Beware of franchises that are charging high initial start-up costs and low, or no, monthly royalties. Chances are these guys know that the business doesn't make much money so they have to make their money up front. Also beware of franchises that charge high monthly royalties. The worldwide standard is around 13% of turnover or less. Anything more and you will be living on the bread line while the franchisor is coining it. A franchisor that cares more about his franchisees and the business as a whole will charge a lower royalty (6% to 10%) as he knows he has a good business where the franchisee can make a good living, while he can also make a good living from many franchisee's royalties.
Buying a Franchise - To learn more about this author, visit Nolan Clark's Website.
Like this article? Share it with your friends
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John PowerJohn Power, founder of Biltmore Franchise Consulting, has extensive experience developing and marketing franchises and business opportunities. He has been in and around franchising for over twenty years. From 1980 through 1990 he conceptualized, organized, and developed the American Video Association. He grew AVA to 2,000 national members, before selling the company it 1990. It was later merged into another home video marketing company. From 2000 to 2005 he worked as a contract marketing and human resources consultant to several local and national companies. In 2005 Mr. Power began working as a franchise development consultant on a full-time basis. Since that time he has helped more than three dozen companies initiate and develop their franchising program. He notes that there are many companies interested in developing a franchise program, and who need his specialized assistance. Mr. Power is a “hands-on” franchise consultant. He said, “I am the ‘nuts and bolts’ person who tends to the details for my clients.” Mr. Power holds a B.S. degree with a major in Marketing. See: www.biltmorefranchise.com You may contact Mr. Power at: jpower@biltmorefranchise.co - Visit John Power's Website |
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Anne BarrAnne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations, networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website |
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Staging DivaDebra Gould, aka The Staging Diva®, is President of Six Elements Inc., an internationally recognized home staging company. Inspired by many requests from aspiring home stagers wanting to start similar businesses, Gould created the Staging Diva Home Staging Business Training Program. Gould has trained over 1000 Staging Diva Graduates worldwide to start staging businesses. Buying decorating and selling six of her own homes in four years lead to an interest in real estate staging which she turned into a career with the launch of sixelements.com in 2002. Since then she has staged hundreds of homes in addition to teaching home staging training. Gould is the author of several home staging resources including a series of popular ebooks made up of a Design Guide, Color Guide and Portfolio Guide. For more information about Debra Gould visit stagingdiva.com. - Visit Staging Diva's Website |
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 Nolan Clark (Visit Nolan's Website) I am an entrepreneur in South Africa and have been in business for 11 years now. While I most definately don't know all there is to know about business, the things I do know have been learnt the hard way. I have started up several businesses over the past 11 years, most of them didn't make it. But with failure comes the opportunity the learn. It is from this School of Hard Knocks that I have been able to start up a franchise of my own as well as a web design company which is doing pretty well. Do I claim to be an expert, heck no, I just enjoy sharing what I have learnt the hard way so that others don't have to.
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