Ensuring the success of your first entrepreneurial venture is tricky. With overcrowded international marketplaces attracting an ever-growing influx of new companies each year, breaking into any industry with original products or services can be challenging.
The plethora of successful franchises around the globe is a testament to the advantages of this type of investment. Think McDonald's, Hilton Hotels and Carrefour; franchise agreements offer a wealth of opportunities and benefits.
To expand on these, we've compiled a list of the main benefits of franchising, but first, it's necessary to define what precisely a franchise is.
What is a franchise?
A franchise is a business license which would give you the right to use the name and branding of an existing business, distribute its products and services, and follow its operating model. For the company, it is an opportunity to accelerate their growth and global reach with limited investment and involvement in the day-to-day management of branches.
For it to work, you (the franchisee) would pay an initial investment fee, followed by regular royalty payments to the company (the franchiser). It's worth noting that agreement terms vary by franchise, so you would need to conduct thorough due diligence before committing to any investment.
Thankfully, this is a highly monitored market, and resources such as the International Franchise Association (IFA) are available for both the support and protection of investors. As regulations are subject to industry and region, it's also recommended that you explore all available local resources, too.
So, what are the benefits?
The benefits of franchising are numerous, but here is a breakdown of the main advantages.
1. You Can Skip the Line
Purchasing a franchise allows entrepreneurs to circumvent the many challenges of establishing a new business from the ground up and trying to stand out in a packed marketplace.
As a result, investors are not necessarily required to have any prior experience - a key benefit which frequently attracts new entrepreneurs to this business model.
By buying into an established company, investors skip over the tasking challenges involved, such as patenting products, creating a business plan, projecting profitability, creating a go-to-market strategy, naming the business and trademarking.
2. No Need for Market Research
Before offering the opportunity for a new reseller to join their model, franchisers conduct extensive market research to determine whether there is adequate demand for business in that location.
Straight away, this eliminates the need for you to perform your own in-depth independent studies on the potential and consumer appetite of this venture.
3. Operational Guidance
In addition to offering a tried and tested business model, franchising offers ongoing profitability and functional supervision, providing you with all the necessary support you'll need as you embark upon your journey. This is important, as it will help you navigate not just the local market, but also any consumer, industry or economic challenge which may arise along the way.
Your franchiser will also allocate advisors to periodically review sales figures, forecasts and any underlying operational management issues with you and your team, as well as provide guidance on how to meet these pre-defined targets. The support you'll receive also negates the need for you to draw up and continuously maintain a budget strategy.
4. Ready-Made Branding and Marketing
Gaining access to an established brand allows you, in many cases, to achieve instant profitability; operating under the same branding, you will continue to benefit from all past and present marketing and advertising run by the franchiser. In today's digitally connected world, the likelihood of global campaigns reaching your regional consumers is exceptionally high, which translates into incremental business for you.
In addition to this, your franchiser will support your own marketing and advertising, with guidance on content creation, campaign delivery, demographic targeting, market analysis and success metrics. This significantly reduces the time and resources needed to invest in this area, allowing you to focus on operational matters and their impact on the business.
5. An Existing Customer Base
On top of gaining the rights to operate under a known brand, franchise investors also have access to something arguably even more valuable – customer loyalty.
By inheriting a satisfied customer base who have had previous interactions with your venture, then you have already achieved one of the most challenging goals of a traditional business. The potential profits from these individuals alone accelerate sales performance much quicker than a new start-up could hope to.
Besides, while the spending power of existing customers is important, so is their ability to refer new business to you. Target these customers with advocacy promotions and campaigns, and watch your customer breadth increase based off of existing brand perceptions and experiences.
6. Economy of Scale Pricing
The scale of large franchise businesses can offer financial benefits to you as a franchisee. Whether it be inventory, point of sale software or advertising services, you will have access to the best-discounted rates from the franchise's approved providers, purely due to the spending power of the brand as a whole.
7. Access to Support Tools and Training
Sophisticated online tools and software systems will be made available to you as part of your investment, allowing you to maintain the consistency of the franchise's overall offering, such as its customer service, reputation, market share and profitability. The added automation from this often-expensive software also means that staff will not be weighed down with unnecessary administrative duties.
Onsite training is also typically provided to both staff and management, covering the use of such software, as well as day-to-day operational expectations, crisis management and more.
8. Reduced Overall Risk
These details all culminate in a significant reduction of risk and an increased likelihood of success. Indeed, statistics show that over 50% of start-ups fail in the first five years of operation, with that figure rising to 70% over ten years. While, of course, franchises are not bulletproof, the comparable levels of security and guidance available through a franchise model are undoubtedly preferable.
What are the downsides?
Despite these many advantages, there are inevitably also drawbacks that you should consider. As mentioned, in addition to the initial acquisition fee, you will be required to make ongoing royalty payments to the franchiser, usually in the form of a percentage of your sales or revenue. You should, therefore, ensure that diligent financial planning is part of your preparation process before investing.
Other challenges - dependant, for the most part, on what your goals are - include the lack of creative control and operational freedom. Be aware that your product offering, route-to-market strategy and branding strategy will all be pre-determined by the franchiser, and cannot be adjusted at your leisure.
Launching your first business venture involves taking on a lot of risk, while it is increasingly difficult to differentiate a new company from among the many industry giants and start-ups. If this uncertainty sounds like too much to deal with, then choosing to invest in a franchise may be a better option.
Either way, make sure you do your homework and that you are prepared for the responsibilities that come with this business model. Always do your research and be prepared for negotiations that will require adequate legal support.
Once you're ready to proceed, though, be sure to take full advantage of the stability that the franchise model has to offer, and begin utilising the support, training and experience of your franchiser to influence your own success!
Are you a franchisee? What other benefits would you suggest? Let us know in the comments below.