I am director of an independent franchise consultancy and have been working with franchise brands and people looking at franchising for nearly 10 years and these are some of the most common questions I get asked by people as they go through the process of looking at franchising:
- Why invest in a franchise instead of starting my own business?
- How do I build a customer base?
- Why should I pay ongoing fees to the franchisor?
Why invest in a franchise instead of starting my own business?
A good franchise company will have started out as a successful independent business once upon a time. They will have reached a stage where they decided to expand and at this point had 2 options.
- Invest company money to set up operations in other parts of the country, employ staff and grow that way
- Set up as a franchise and seek to attract investors (franchisees) to become business owners using the brand name, processes and systems to grow quickly and steadily
Option 1 is a very expensive option for companies and managing staff at a high level can be very costly and difficult.
Option 2 is costly to begin with (companies may spend between £10,000 and £100,000 to get everything in place to be able to offer a genuinefranchise opportunity)
Franchisors look to recoup these costs through a certain percentage of the investment that is made by a franchisee to start the business and ongoing charges to the franchisee through the support that is offered.
Ongoing charges are called the Management Service Fee (MSF) and this is usually either a percentage of turnover, or a fixed monthly fee.
To answer the question therefore, 75% of your investment is usually directly reinvested by the franchisor into helping you set up the business. This is usually through the initial training they provide; financial assistance; legal costs associated with the franchise agreement you will sign; the hardware and software you need to run the business; sourcing and providing a vehicle for the business; ongoing training; stationary, etc.
If looking to invest in a good, ethical franchise, then you are also getting a proven business model and system which has been successful time and time again by other franchise owners up and down the country.
It is very hard to place a value on starting a business where all the mistakes have already been made and corrected, with systems tried and tested.
How do I build a customer base?
If the Management Service Fee (MSF) is set as a percentage of the turnover, then a franchisor should provide all the training and support to ensure that you will be able to build a customer base in a proven and successful manner, and by following a business plan.
If you are not building a customer base, you will not be making any money and therefore the franchisor will not be making any money either, so it should be in everyone’s best interest to ensure that you can build a good customer base.
Why should I pay ongoing fees to the franchisor?
Quite simply you should be paying for the continuing support you’re getting from the franchisor, and the use of systems and processes on an ongoing basis. Think about it – if the franchisor was not making any more money out of you, why would they continue to show a lot of interest in your development?
A franchisor should not make much of a profit from your initial investment, so they therefore need to ensure that they retain an interest in your business and your success. This is usually achieved through a percentage of your sales, so it is in their best interest to ensure you have as many customers as possible so they can make more money, and of course you will be as well.
The bottom line
The level and speed of growth you can achieve with a good franchise brand is almost impossible to achieve in a new independent business startup without investing a considerable amount of money, and having a considerable amount of luck.
If you select the right franchise in the right sector and one that ticks your boxes, you have a 90% chance of still running that business in 5 years time and also being profitable. The statistics on an independent business are that 90% fail within a 5 year period, and many that survive beyond 5 years, are not profitable.
The question you need to ask yourself is whether you have the know-how, ability and financial available to start your own independent business, because unless you simply want a small business that ticks over, providing a small level of income, then you will need to invest large sums into setting up, marketing, websites, systems, vehicles, branding, logos, trademarks, etc in order to grow a serious business.
Franchising gives people the chance to build a big and profitable business without the risks, and over a 5 year period will always cost far less than trying to do it yourself.
The key to selecting the right franchise is by carrying out the right research, and I can certainly advise you on how to do that in best way possible.
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