The First 3 Questions You Should Ask Yourself to Determine if Franchising is Right For You

The First 3 Questions You Should Ask Yourself to Determine if Franchising is Right For You

So you’re interested in owning a business, but you don’t know if franchising is right for you. Franchises can be a great business to enter into because they operate under one successful trademark and can generally achieve more than what individual business people can. But the fact that franchises may have a better or quicker success rate than independent businesses is not the only factor you should consider when contemplating whether or not to buy into a franchise. Here’s a list of three key questions you should ask yourself before making your final decision:

1. Can you afford the franchise?

Before asking yourself any other question, ask yourself if you can realistically afford the startup costs of the franchise plus any further costs you accumulate before you hit profitability. Even though the franchisor can give you an idea of what the initial costs will be, actual costs always vary depending on the needs of the business. You need to have enough capital to not only open the franchise, but also run it until it is profitable and stable. For some businesses, this might take one year, for others more, and others less. So plan your finances as accurately as possible, ideally overestimating your expenses to limit your risk of under capitalization. This will greatly diminish your risk of failure.

2. Will you enjoy the franchise?

A lot of times, people may be interested in a franchise simply because of the potential capital they can generate. While a business’s success rate should be something you’re concerned with, it should not be the only reason you picked that franchise. Running a franchise is no easy task; it will undoubtedly pose many challenges, and you should anticipate working in it for the next 10-15 years (at least.) So if you’re planning on owning a franchise, make sure you’re interested in the industry and think you can enjoy the day-to-day work entailed in that specific business.

Aside from liking the particular industry, product, or service the franchise is involved in, also make sure you like the franchisor’s staff. These are the people you will be constantly contacting for support and advice, so make sure you feel comfortable working with them as you will be working with them for a long time. If the relationship sours, you could end up regretting your decision.

3. Does the franchisor and existing franchisees you are considering have a track record of success?

So you made sure you have the right amount of capital to invest in a franchise, and you picked out a franchise in an industry you are interested in, but did you research that particular franchise’s success rate? It is very important to do research, not only regarding the franchisor’s level of success, but also the individual franchisees record of success.

If the franchisor is successful but the franchisees seem to be going downhill, what does that mean? What if it’s the other way around? You want to make sure you invest in a franchise where the franchisor offers enough guidance and support to help your franchise soar. Obtaining this information can better help you project what your success rate will be and in the end, if your investment will be worth its value.

Conclusion

There are many other considerations that will go into your final decision, but these essential questions will help you determine if you’re ready to take the next steps towards becoming a franchisee.

Why Franchisors and Franchisees Have Trouble Seeing Eye to Eye

FranchisingBuying a franchise is a great way to acquire an instant customer base, proven business model, and polished operational support. But as many franchise owners soon discover, this great purchase can also come with a downside: disgruntled franchisees.

Life is full of conflict, and the franchise industry is no different. But franchisor/franchisee disputes specifically arise out of the inherent nature of the franchise model. Why? Because franchises motivate each party towards different goals. When it comes down to it, franchisees and franchisors just want different things because they make their money in different ways. This obviously creates a vulnerable spot in the franchisor/franchisee relationship, where conflict is more likely to arise.

So how do we fix it? There will probably never be a way of eliminating all franchisor/franchisee conflict entirely (wouldn’t that be a dream?), but recognizing and understanding the factors at play is the best way to avoid either creating or escalating disagreements between parties, especially to the point where litigation becomes necessary.

To understand where this inherent conflict comes from, let’s start with the basics of what franchising is: franchising is a business arrangement in which one party (the franchisor) rents a business model and brand to another party (the franchisee), who uses it to sell products/services to a customer base. The amount the franchisee pays is usually calculated as a percentage of their gross sales, meaning the franchisors profits increase with franchisee sales. This means a franchisors priorities and day-to-day concerns are usually focused on adopting policies and enacting strategic business decisions that maximize sales at each franchisee location.

Franchisees, however, make their money a little differently. They make money by generating revenue that exceed their costs, which means a franchisee is going to prioritize policies and pricing that maximize profits at their locations.

This is the part where conflict arises: policies that maximize outlet-level sales aren’t the ones that maximize outlet-level profits.

Need an example? Let’s look at buy-one-get-one-free discounts. Successful buy-one-get-one-free promotions bring in more customers and boost sales. This is great for the franchisor whose earnings are linked to outlet-level sales. But for the franchisee, this successful promotion doesn’t necessary boost their profits. If the size of the average customer purchase doesn’t increase, the franchisee could actually be worse off. The buy-one-get-one-free promotion raises the franchisee’s costs (by the amount of the free item) while potentially (and often in reality) failing to boost revenues.

These kinds of conflicts aren’t rooted in ill will or pettiness. It stems from the basic structure of the business model. What’s good for the franchisor is not necessarily good for the franchisee. If enough money is compromised, the end result could very well be a lawsuit.

Here’s a real world example: a few years ago Burger King wanted its franchisees to stay open late to sell more fast food to those seeking it at off hours. If franchisees sell more food due to being open during off hours, Burger King brings in more royalties, boosting its bottom line. This was a great plan from the franchisors point of view, but staying open late ultimately caused the franchisees to lose money. They had to pay employees for the additional hours even though their late-hour revenues were less than those wages. Its franchisees ended up in court over the disagreement.

Another common point of contention is the opening of new locations. When an additional location is opened up, often times it takes away from sales at an existing outlet. Franchisors are still better off because the new establishment inevitably increases system-wide sales, but this doesn’t help the franchisee that was around first. Their cost of operation remains the same, and they end up with lower sales.

It’s important for both franchisors and franchisees to be aware of how the other party is motivated in order to create a more understanding and effective dialogue. When they work together from a place of mutual respect and understanding, they can enact policies and business strategies that are involve more compromise and mutual benefit. One party may benefit more from a particular policy, promotion, or opening, but working together can insure minimal risk to the other, and create a lasting positive relationship for all.