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February 09, 2004
Franchising with eyes wide open
Franchising is a common entry strategy into the world of entrepreneurship. For many, franchising is a safe a secure first step into business ownership. While for others, as this article from startupjournal.com illustrates, franchising can be an unsatisfying detour down the road to economic independence.
There are several very good reasons to pursue a franchise as a first time entrepreneur.
First, most franchises have a business model already in place that has been tested and refined. In most cases, the model must have already been proven to attract the financing that is necessary to launch most franchised concepts.
Second, the systems should be well established and ready to go. Much of the trial and error that first time entrepreneurs have to go through with their specific ventures is in the operating processes and procedures. The devil is most often found in the details, so having these systems in place at start-up can save time and money.
Third, a franchisor can provide significant help in marketing. Not only can the franchisee benefit from any regional or national promotion supported by the franchisor, but well tested content and strategies for local advertising should also be available.
Fourth, many would-be entrepreneurs I meet with are struggling to find an idea to pursue. A franchise eliminates the need to come up with an original, creative business opportunity. If creativity is not your strong suit, a franchise may be a viable option to investigate. But, make sure to look at several options, as costs and quality can vary significantly between franchised businesses.
Finally, a franchise is a good option for someone who has an interest in a type of business, but who has little experience. Although specific experience is not always necessary for success, it does create a major advantage in certain industries such as restaurants.
With all of these advantages, there are several sobering disadvantages of franchising that should be carefully weighed by any aspiring entrepreneur. Lawsuits by franchisees against franchisors are actually a fairly common event. And almost every major franchise at some point in time establishes a franchisee relations committee to help deal with complaints and grievances from franchisees. In fact, both franchisees and franchisors both have their own national associations to deal with public relations and the mounting legal and regulatory issues facing this form of business. Beyond the contractual issues that arise in franchising, there are some fundamental business and personal concerns that many franchisees experience after it is too late.
One of the biggest sources of frustration among franchisees is that they perceive that the value added they get from association with their franchisor diminishes over time. A franchise will charge a significant monthly percentage fee (this can average about 7% of sales) associated with all that they offer in terms of systems, marketing, purchasing power, and so forth. Over time, many franchisors realize that they can be just if not more effective on their own without paying the monthly percentage of sales to the franchisor. This on-going monthly fee is often glossed over by franchisees during start-up planning, as they tend to think only about the initial fees and capital expenditures in their planning.
Another concern expressed by franchisees is that with all of the rules and standardized procedures, they tend to feel more like an employee than a business owner. Those who try to break away from the predetermined model and processes can face the wrath of the franchisor. Larger franchisors have entire staff dedicated to franchisee compliance.
A financial risk to consider is that many first time entrepreneurs can only afford newer franchised concepts, since well established franchises can cost hundreds of thousands of dollars to buy in. These start-up franchisors can begin to experience their own growing pains. Some don?t survive. In some cases they may take the franchisees down with them.
It is critical to understand all of the ins and outs of franchising as a general business strategy first. Then if the idea of a buying a franchise still makes sense, do your homework on the company and its concept. All franchise opportunities are not created equal.
Posted February 9, 2004 06:39 PM
Comments
This seems like being in a half way house. You feel like you have finally done it, you have finally gotten into the business world and can put your creativity and passions to the test only to find that you still have Big Brother breathing down you back and criticising your everymove. I guess franchising would be a great idea for someone that maybe has worked within that company before and wants to own their own or for people that do like to have the ruls laid out for them and ideas and strategies instilled for them but it doesn't sound like something I would want to do. The entrepreneurship world is a vast place, jump in on your own.....
Posted by: Jason at February 10, 2004 07:02 PM
An excellent article. I had actually never thought about the down side of franchising. After reading Entrepreneur Magazine's annual Franchise 500, it seemed like such a great option. Now I realize that a lot of those articles were written from the franchisOR's point of view, so of course everything sounds wonderful. However, I don't think being a franchisee is all bad. Suppose you would like to start a venture in a particular industry, but you don't quite have it all together or know all the ins and outs yet. A franchise could be good experience for "cutting one's teeth." You get hands on experience. Learn what works, what doesn't work. Learn how corporate culture and core values must be consistent throughout the entire company in order to make the system work. Take concepts and ideas and then make them your own with your own venture. An article on entrepreneur.com http://www.entrepreneur.com/article/0,4621,308346,00.html is an example of this.
Posted by: Samira at February 10, 2004 07:33 PM
at Belmont University in Nashville, Tennessee. He consults with a variety of businesses on start-up and growth related issues, and with larger corporations on re-establishing entrepreneurial cultures within their organizations. Dr. Cornwall's current research interests include entrepreneurial finance and entrepreneurial ethics. He has authored or co-authored four books.
