To franchise or not to franchise?

If you're thinking of starting your own business, you may have considered franchising as an alternative. There are several benefits associated with owning a franchise business, particularly in today's uncertain economic environment.

Franchising gives you an established brand name under which to operate, so your customers will recognise you instantly. You'll also receive ongoing support and guidance from your franchisor, helping you to navigate the often complex worlds of financing, marketing, recruitment and customer service.

Becoming self-employed

Thousands of people lost their jobs during the recession, and while some were lucky enough to find new posts, others found themselves stuck in a highly competitive jobs market with few opportunities.

As a result, the number of people starting up businesses has risen. Indeed, the idea of becoming self-employed is an attractive one to many of those who have toiled with long working hours and heavy workloads

But the economic environment remains uncertain and businesses are still struggling, which means starting up a new company is not without its challenges.

That's why many entrepreneurs have gone down the franchising route, as it offers them a more accessible route into the world of business ownership at a time when companies around the world are fighting to survive.

What is franchising?

Franchising is a business model under which the owner of a business format grants licenses to others to sell their products or services and trade under their name for an initial fee and a percentage of sales revenue.

In return, they provide ongoing help and support, often in the form of staff training, product development, advertising and management services.

While the franchisee owns their particular outlet, the franchisor has control over the intellectual property and determines how products are marketed and sold, and how their business format is developed.

Brand identity

One of the most difficult tasks for any new business owner is creating a brand identity that customers can trust. With franchising, a brand identity already exists and often consumers are well on board with the business format.

For this reason, an entrepreneur opening up a franchise business is likely to turn a profit much more quickly than a start-up company.

Indeed, the latter may spend months getting its name out there and convincing consumers that their products and services are worth buying, whereas a franchisee can get straight down to the business of meeting customer demand.

A proven business model

No matter how much research an entrepreneur carries out before setting up a new business, there is always an element of risk involved, particularly if competition in their sector is high, or their product offering is relatively niche.

With a franchise, the business model has already been tried and tested, so the risks of failure are much smaller. Any mistakes that are made along the way are translated throughout the franchise system, so franchisees don't have to through their own individual learning curve to reach the top.

Ongoing support

Entrepreneurs who set up their own business are pretty much on their own, unless they pay for expert guidance. In franchising, ongoing support is offered as part of the package, at the outset and as the business grows.

Training is usually offered once a franchise deal is signed, equipping franchisees with skills in sales, financing and other key areas necessary for the ongoing success of their business.

Some franchisors also help franchisees with product research and testing, as well as offering group buying discounts and running national advertising campaigns, leaving owners to get on with their day-to-day operations.

Franchising too is not without risk

In some cases, franchising sounds too good to be true, and this may be the case. Franchisors differ significantly in terms of brand recognition and the support they provide, as well as the ongoing fees they charge.

For this reason, thorough research is needed to determine whether a franchise business is likely to be a success. Some franchisors may begin franchising too early and their brand may not be so well known in certain parts of the country, or indeed the world.

Franchisees should be clear on all costs before signing a contract and make sure they determine the level of customer demand in their area.

Perhaps one of the most important things for a potential franchisee to remember is that their creativity and flexibility are limited through the business format franchise model.

Those who truly want to be their own boss and make their own way in the world of business should therefore think carefully before agreeing to trade under someone else's banner.

But there is evidence franchising works

According to the latest figures from NatWest bank, the business format franchise sector made an estimated £11.8 billion in turnover last year, with 89 per cent of franchisees reporting profitability during 2010.

Contrast these with figures from the Office for National Statistics, which showed that in 2009, the number of business failures outpaced the number of new businesses being started up, and it's easy to see why franchising is an attractive option.
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Published on: March 10, 2011

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