Thursday, April 21, 2011

Should I Buy a Franchise?

clip_image002[1]This article was written by Betty Otte, SCORE Orange County Management Counselor

Editor’s Note: This is the first of three articles by Ms. Otte on the subject of franchising. If you miss any of the series, refer to the archives banner on our blog where you can catch up.

When most of us think about franchises, we are referring to the business-based franchise like the top 500 franchises published in Entrepreneur magazine each year. Entrepreneur’s 75 different categories range from automotive to services, but they all have one thing in common – a systematic method to deliver services or products.

Franchising is not for everyone, but for an individual who has limited business experience or someone who enjoys working within an established system, franchising can be the best possible path.

Franchising is simply a method of distributing products or services, with at least two levels of people involved. The first is the franchisor, who lends his trademark of trade name and a business system. The other is the franchisee, who pays a royalty and often and initial fee for the right to do business under the franchisor’s name and system. The contract binding the two parties is the “franchise” but that term is often to mean the actual business that the franchisee operates.

Do You Have What it Takes?

Before you go into any business, franchise or not, it is important to first ask yourself these important questions:

· Do you have strong motivation and drive to achieve success?

· Do you have confidence and enthusiasm for the product or service you will be representing?

· Are you able to motivate yourself and others and train employees?

· Do you have experience in the industry?

· Are you willing to promote your business and the brand?

The Franchise Lifestyle

Figure out if a franchise lifestyle fits into your own lifestyle. Do you have the necessary support system to open this franchise? Does your family support this decision? Do you have an accountant, banker, and attorney who will assist you in your start up and growth phases?

The Importance of the Brand

In the franchise world, belonging to a system gives you, the franchisee, a competitive edge, which primarily compensates for the cost of being in the system. The main value in franchising is the identity related to the brand. McDonald’s is the largest franchisor in the world with over 31,000 units. Due to consistency of product delivery and global advertising, McDonald’s has a major advantage over, say, Joe’s Diner.

It is important to remember that since the brand’s value is more important than anything else -- including the service or the product -- the customer’s loyalty is to the brand, NOT the individual franchisee. No consumer walks into a Dunkin Donuts franchise because they know the owner. They know Dunkin Donuts. What this means is that within a franchise system, you have to play by their rules. You couldn’t open a McDonalds and sell pizza for example.

Your success as a franchisee is based on your willingness to work within a pre-existing system, and help to build the value inherent in the brand. This kind of a business is not for everyone, so you have to be honest with your ego on this one.

Choosing a Franchise

So let’s say you are willing to work within a system promoting their brand or service and you are not concerned that customer loyalty is not directed to you personally.

Now what? What kind of business should you think about?

The choices can be overwhelming. Approximately 45% of all retail sales are franchise driven – everything from tires to laser hair removal. One out of every 12 businesses is a franchise, with a new outlet opening every 8 minutes. In addition, there are over 75 industries to choose from, with many of those industries having dozens and dozens of options. How do you decide?

Go back to your personal likes and dislikes. Don’t gravitate to the fast foods just because you already know how to make a sandwich. Some top industry choices include auto, children, cleaning, exercise and chicken. Find an industry that you wouldn’t mind doing and thinking about 24/7. Then research all the different options within that industry. Some good resources include Entrepreneur Magazine’s annual top 500 franchises list, the International Franchise Association, or even Google.

Taking the Next Step

You have decided that you don’t mind building the brand and you confess that you will most likely have a higher success rate within a franchise than on your own. You also want to be a part of the annual $1.55 trillion dollar franchise revenue and you have selected your industry. Now what?

Now the fun begins as you start the research that will determine the difference between good and bad franchises. Remember that SCORE has many volunteers ready to help mentor you, many of whom have franchise experience. Seek help from your next SCORE office or online SCORE counselor. SCORE counseling is always free and confidential.