Planning to start a franchise business?
There is already a variety of franchises available out there and along with the growing number are the opportunities for a profitable investment. However, you cannot have a successful venture without getting a full grasp of what franchising is, as well as the aspects it involves. To help you, we’ve sourced the web to provide a comprehensive guide on franchising and what you need to know when starting a franchise business.
The Basics of Franchising that You Need to Know
What is Franchising?
A franchise is a business system involving a franchisor and the franchisee. A franchisor is the business owner, either an individual or a company that licenses trademarks and methods to a franchisee.
This is the bond that lays out the obligations of both parties and ties the relationship between the two entities. The franchisee must pay a fee in exchange of the use of trademark, training programs and support system, products or services and the business system.
Franchising in Australia
Franchising is fast becoming the most active and progressive business sector in the Australian economy. In fact, in 2014, the Franchise Council of Australia has recorded approximately 1160 business formats in the country, turning over around $144 billion in annual revenue. It reports that there is an estimated 79,000 franchise businesses that employ more than 460,000 people.
To show you the sectors where franchising has been the growth driver, below is a list of the leading franchise industries in Australia:
Restaurant, Bakery, Cafe
Salon, Gym, Fitness center
Day Care and Other Home Services
Along with the rise in the franchise industry are the top players that have shown exemplary performance and outperformed their competitors in terms of the support and opportunities they grant at a franchise wide and localised level.
Below are the Australian franchises which made it to the TopFranchise.com list, based on the ratings given by their franchisees.
- Smartline Mortgage Advisers
- Ferguson Plarre Bakehouses
- Mister Minit
- Soul Origin
- Kwik Kopy
- Mrs. Fields
- Bridgestone Select
The Pros and Cons of Franchising
Like any other business, there are also two sides to franchising. Before embarking on a venture, you should know the ups and downs of entering the industry to be able to prepare for the challenges that may take you by surprise.
Here we’ve summed up the top 5 advantages of franchising that can fuel your drive to pursue your venture, as well as the top 5 disadvantages that you need to know about.
5 Advantages of Franchising
1. Established Business Model
All franchisors already have a proven formula designed to improve overall operations and increase sales of the franchise business. Having an established business model in place eliminates the major hurdles and guesswork startup businesses normally face.
2. Marketing and Business Support
Franchisees benefit from the marketing strategies and business support from the franchisors and as well as the strength of the brand and its loyal consumer base. You get access to all the trade secrets and as well as the advertising and public relations programs designed to attract prospective franchisees and consumers alike to the sites operated by franchisees.
3. Ongoing Training
The franchisor provides management and technical trainings to help franchisees run the business exactly the same way the other franchise locations are run. This ensures that the business is operating efficiently to eliminate the mistakes often committed by a startup business.
4. Easier to Secure Financing
You may find it easier to secure finance for a franchise. Aside from the fact that buying a franchise may cost less than starting a business of the same type, some franchisors provide assistance to help franchisees. Likewise, banks are often confident in granting franchisors loans to finance the purchase of a franchise thanks to the proven track record of the industry.
5. Higher Success Rate
A franchise is more likely to succeed compared to an independent startup because of the support of the system. Venturing in a franchise means entering in a business where the franchisor has already taken most of the risk, which is more often than not, is what you are really paying for.
5 Disadvantages of Franchising
1. Initial Payout
Some well-established franchises involve very large initial costs, often more than what it would cost to start your own business. In addition to the franchise fee, you will also have to purchase equipment and lease a building or a space.
2. Ongoing Costs
Aside from the initial cost, franchisees also have to pay royalty fees as long as you are a franchisee. It is often calculated as a percentage of the revenue and is usually paid monthly or quarterly. The franchisor may also charge additional fees for the services provided including marketing and advertising.
3. Strict Guidelines
The strict nature of a franchise may limit your ability to introduce alterations that could possibly improve your business. Most franchise contracts have strict guidelines that confine your authority over any aspect of the franchise including advertising, marketing strategies, the products and services that you provide.
4. Sole Sourcing
Some franchise contracts require that franchisor must source supplies only from an approved list of suppliers. With sole sourcing, there are no options as to where you can source products at a cheaper price.
5. Shared Reputation
The reputation of your franchise is dependent on its parent company. It will only be as good as that of the franchisor as long as they maintain their reputation without issues that will likely have a direct impact on you. Otherwise, even if your franchise is not guilty of an offense, you will still be deemed guilty.
Simple Steps to Choosing the Right Franchise
The franchise industry is continually growing with more opportunities becoming more available. While there is plenty of options to go for, deciding on the right franchise to buy will still play an important role in determining the success of your business. Here’s five simple steps that will help you determine the right franchise for you:
Step 1: Evaluate Yourself
Is there a franchise in your future? Evaluate yourself whether you want to see yourself as a successful franchise owner years later. Give some thought on things like what skills you can bring to the table, how much you are willing to invest and where you want to operate your business. Once you determine the answers to these questions, you’ll be able to evaluate what is a good match for you.
Step 2: Do Your Research
Research and review a list of franchises to explore available franchise concepts and opportunities. Focus on the industry groups or categories that appear to meet your desired criteria. Although research into the market is important, it is also a must to learn more about the company you are partnering with.
Step 3: Narrow Down Your Options
Once you have the list of potential franchises you would like to buy, narrow them down into a fewer options according to your interest, to the industry which you have past experience or interest with, and your budget.
Step 4: Review Franchise Agreement
After your initial contacts and the submission of a qualification questionnaire, the franchisor will usually provide you with its Franchisor Disclosure Document (FDD), a document mandated by the Federal Trade Commission (FTC). It contains an extensive information about the company and a comprehensive detail about the relationship between the Franchisee and the Franchisor.
Step 5: Decide
Now that you know all the details, it’s time to decide which franchise matches your financial resources, can keep up with the lifestyle you imagined, uses your particular skills and experience, meets your goals and has a remarkable list of successful franchisees. It is also important to consider the company’s image, their reputation or whether it will sell to your targeted area.
Funding Your Franchise: What Are Your Financing Options?
While your franchisor may offer recommendations or help you with the lenders, some may even provide debt financing themselves. It will be a win-win situation since funding your franchise will help you get started sooner. Ask your franchisor what they can do for you.
Small Business Administration (SBA) Loans
SBA loans is a recommendable way to fund your franchise. It is a small-business loan issued by a participating lender, mostly banks, and is guaranteed by the SBA. The SBA can guarantee as much as 85% of the loan. This agreement reduces the risk for bank lenders, making them more willing to lend to
TIP: Franchise loan applications are looked upon more favorably by the SBA than loan applications for independent startups, since franchises are turnkey operations and therefore a safer bet.
Often times, new franchisees have the energy, drive and skills to succeed, but lack the money to get started. If you’re one of these, consider pairing up with an investor or a venture capitalist interested in your business.
Is Franchising For You?
Although a franchise gives you a proven model to follow, owning one does not completely remove the risk that comes along with starting a business. However, if you feel that franchising is where you will be successful, it will be best to consult an expert that can help you start your franchising journey.
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