If buying an existing business does not sound right for you, but starting from scratch sounds a bit intimidating, you could be suited for franchise ownership. We definitely have looked into a franchise and may consider one in the future!
What is a franchise and how do you know if you’re right for one? Essentially, a franchisee pays an initial fee and ongoing royalites to a franchisor. In return, the franchisee gains the use of a trademark, ongoing support from the franchisor, and the right to use the franchisor’s system of doing business and sell its products and services.
In addition to a well-known brand name, buying a franchise offers many other advantages that aren’t available to the entrepreneur starting a business from scratch. Perhaps the most significant is that you get a proven system of operation and training in how to use it. New franchisees can avoid a lot of the mistakes start-up entrepreneurs typically make because the franchisor has already perfected daily operations through trial and error.
Reputable franchisors conduct market research before selling a new outlet so you will feel greater confidence that there is a demand for the product or service. Failing to do adequate market research is one of the biggest mistakes independent entrepreneurs typically make; as a franchise, it’s done for you. The franchisor also provides . you a clear picture of the competition and how to differentiate yourself from them.
Finally, franchisees enjoy the benefit of strength in numbers. You’ll gain from economies of scale in buying materials, supplies, and services, such as advertising, as well as in negotiating for locations and lease terms. By comparison, independent operators have to negotiate on their own, usually getting less favorable terms. Some suppliers won’t deal with the new businesses or will reject your business because your account isn’t big enough.
You will have to take time out to ask yourself some essential questions:
- Will you run it yourself or hire a manager?
- Does the franchise require you to be involved?
- How much of a cash investment does it require and how much operating capital do they expect once you get it up and running?
Some options include:
- In the “Below 150K Investment” range – elderly care, child tutoring/advancement, and home cleaning services dominate the list.
- In the “150K to the 500K Investment” range – quick serve restaurants dominate the list.
- In the “Above 500K Investment” range – split between child tutoring and advancement, quick serve and chain restaurants, and mid-range hotels including Marriott and Hilton.
Even if you are planning to hire a manager, you would also have to oversee the hiring of the entire staff that can effectively run the place. Moreover, you will also have to regularly monitor the workings of the franchise to ensure everything is running smoothly, and there aren’t any issues or potential problems.
Thе Pros
The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many – brand awareness, uniformity in meeting customer expectations, the power of pooled advertising, and the efficiencies of group purchasing.
For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business program has already proved to be successful in the marketplace. The use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognize, and the advantages of group advertising and purchasing make operations more profitable. Also, ongoing training creates instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally. Operating a successful franchise may quickly lead to building a second and then a third business, and so on. Fortunes have been built this way.
The Bеnеfitѕ
- Reduction of risk
- Turnkey operation
- Standardized products and systems
- Standardized financial and accounting systems
- Collective buying power
- Supervision and consulting readily available
- National and local advertising programs
- And more….
Thе Cons
Franchising, however, is not for everyone. Fiercely independent entrepreneurial types (you know who you are) may chafe under the strict operational requirements and specifications of a franchised business. If things have to be done your way, you may want to head in another direction.
Also, know that some franchise systems are better than others. A weak franchise program will not train you well to handle the challenges of the business, will not adequately assist you when problems arise and will not make the best use of your advertising dollars.
The Dоwnѕidе
- Start-up costs
- Loss of control
- A binding contract
- The franchisor’s problems are also your problems
If you’re considering buying a franchise, don’t let wild expectations influence your decision. While franchising is designed to put people into the business who have never owned a business before, the excitement of ownership can create an impulse to move forward without proper planning. If you rush headlong into buying a franchise expecting to boost your current working salary, but the earnings don’t allow you to pull out more than half your former salary, you will be one unhappy camper. Work with a good CPA to prepare a cash-flow projection for the business before you take the plunge. Know how long it will take to break even and turn a profit, as well as the amount of salary you’ll realistically be able to pay yourself.
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