ANY new business involves risk. The proportion of new businesses that fail within their first two years of operation is much higher than those that succeed. Whether you can afford risk of your business failing depends on your own individual circumstances. If you are continuing in full-time paid employment and your business is something you start in your spare time for a little extra cash to see how it goes before quitting your job, then you are more likely to be able to afford risk of that business ultimately not succeeding.But what if you've lost your job, taken a package, and are looking for a business in which to invest proceeds of your package? All of a sudden risk of your new business failing looms very large indeed.
One way of reducing that risk is to consider buying a franchised business.
WHAT IS A FRANCHISE?
Simply put, franchising involves owner of business which is being franchised ("the franchisor") granting to person who wants to offer products and services of franchisor ("the franchisee") rights to use its trademarks, business names, associated intellectual property, know-how, business systems, training systems and operating manuals in exchange for monetary payment in form of an initial franchise fee/purchase price and/or ongoing royalty payments which are typically calculated as a percentage of franchisee's turnover.
ADVANTAGES OF A FRANCHISE
-> Proven system
The franchisor has already done work of establishing a system for business being offered for franchise. This system provides you, franchisee, with a roadmap to follow, hopefully to success. The franchisor has already tested and refined all aspects of business and has created a "business success formula" for franchisee to follow. This means that you are spared trial and error of working out what works and what doesn't and are therefore freed to focus on "working system", hopefully generating profits within a short period of time.
-> Avoid many start-up problems
Starting a business from ground up requires a lot of time and effort just getting basics in place. These include major undertakings such as developing a reputation in market place, obtaining finance to fund new venture and overcoming competitive threats, as well as more mundane such as what business licenses to obtain and what insurance cover to purchase. The franchisor will have already done a lot of this work. For example, franchisor will already have developed a reputation for business in market place, will have identified competitive threats and opportunities, incorporating ways of meeting them within franchise system and will usually have already established relationships with service providers such as financiers.
-> Existing name and reputation
As stated above, you do not need to invest significant time and effort into getting your business known in marketplace as franchisor will already have done this for benefit of group as a whole.
-> Support when needed
You are not on your own when things go wrong. Got a business problem? Contact your franchisor for assistance. The franchisor will have employed many different specialists within its organization who are there just to assist franchisees successfully operate their businesses. In my 14 years of experience in franchising, most successful franchisees were those who were not afraid to ask for help when needed. The most unsuccessful were those who thought they knew it all or, for whatever reason, refused to ask for help when they needed it.
-> Group buying power
Depending on size of franchise network, group should benefit from being able to negotiate favorable buying prices because of their ability to generate volume sales for supplier.
-> Group advertising
By contributing advertising fees into a group fund, individual franchisees are able to benefit from much greater advertising exposure than they could afford if each franchisee had to market their business on an individual basis.
-> Greater knowledge base
The franchisor is likely to have invested in market research for benefit of group as a whole. This means group has a much greater knowledge of their market(s) than does local "independent" competitor. The results of this market research can be put to good use in group's advertising and marketing programs.
DISADVANTAGES OF A FRANCHISE
-> Restrictions on autonomy
Because you're buying rights to participate in a proven "system", franchisor will be concerned that all franchisees adhere to system and not operate outside it. After all, if franchisees are free to adhere to system or not as they see fit, there is no point in buying into a franchise at all. For this reason, for benefit of system as a whole, franchisors will generally impose strict controls on things such as quality and types of products and services that you may offer for sale, types of local advertising you may undertake, methods of dealing with customers, ethical conduct and like.