How Does Franchising Work?
Franchising is a business arrangement where one party (franchiser) gives power and authority to the other party (franchisee) to expand the business’s geographical niche and market share at a low cost. After the franchiser and franchisee sign the contractual agreement, the latter can sell their products and services and get unrestricted power to use their brand name and trademark.
Characteristics of Franchising
- The franchisee can only use the franchiser’s trademark under a business permit (license).
2.The franchisee can only follow policies on how to operate the business, as stated in the agreement.
3.The franchiser must supply the franchisee with relevant market support and technology, as stated in the agreement.
- The franchiser offers complete training and assistance to employees working in the franchisee’s business.
- The franchisee has to pay the royalty for using an established business model. The royalty fee is paid every month and is calculated as a percentage of the profits. Depending on the volume and industry, this can range from 4% to 12%.
- The agreement between the two parties is short-term though it can be extended.
Advantages of Franchising
- It gives the franchiser a chance to increase his market within a short time.
- Franchising provides the franchiser with vital information regarding the product’s popularity, choices, and needs consumers.
- It increases the business goodwill through an expansion of the network.
- The franchisee spends less money on marketing products as the franchiser’s business is already established.
- The right to provide goods or services remains with the franchisee.
How to Choose the Right Franchise
Before deciding which franchise works for you, conduct research to determine which firm is worth investing your time and money. First, estimate the startup cost. Franchising requires a lot of capital. Apart from the franchise, advertising, and royalty fees, buying and operating a franchise will need you to dig deeper into your pockets. There are other expenses like supplies and equipment, inventory, business remodeling, and employees’ hiring and training. Hence, conduct thorough market research to find which company fits your budget.
Invest in a franchise that is popular in your region. If your locality has little or no demand for the franchise’s services or products, be sure that you will need to invest more money and time in marketing. This can be avoided by partnering with a franchise that has already established its market. Also, look at the level of competition in your region. If the market is saturated with the same products and services, it may affect the demand and supply chain, hindering business stability.
The level of training and support your franchiser is willing to provide both at the initial and later stage can help you evaluate their thoroughness.
What is your franchiser’s reputation? It is wise to only work with an experienced, reputable, and trustworthy franchise. To achieve this, look at reviews from previous franchisees taking note of any complaint that could have been filed against the firm. Thanks to technology, you can quickly get this information from the internet. Where possible, reach out to other franchisees as they are better placed to give you honest opinions on owning a franchise with a specific company.
Lastly, invest in a franchise that suits your taste and preferences. Your investment choice must work for your lifestyle. Like starting a business from scratch, a franchise also requires you to dedicate your time and effort to keep it operational. Therefore, pick a company that excites you, whose hours fit your daily routine, and whose short-term and long-term objectives and goals are similar to yours.
The (FTC) Franchise Rule requires licensed franchisers to provide the franchisee with all the necessary information to help them make an informed decision whether or not to invest with them. The information presented as the franchise disclosure document must be provided during the first personal encounter where the franchisee’s prospective investment is discussed. The exact details are again discussed ten days before signing a contract. This provides the franchisee with enough time to make a conclusive business decision.