The Search For An Opportunity

The Search For An Opportunity

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Ready to become a franchisee? Here’s what you need to know.
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If buying an existing business doesn’t sound right for you, but starting from scratch sounds a bit intimidating, you could be suited for franchise ownership. What is a franchise — and how do you know if you’re right for one? Essentially, a franchisee pays an initial fee and ongoing royalties to a franchisor.

In return, the franchisee gains the use of a trademark, ongoing support from the franchisor, and the right to use the franchisor’s system of doing business and sell its products or services.

Related: Franchising Mistakes You Need To Avoid

In addition to a well-known brand name, buying a franchise offers many other advantages that aren’t available to the entrepreneur starting a business from scratch. Perhaps the most significant is that you get a proven system of operation and training on how to use it.

New franchisees can avoid a lot of the mistakes start-up entrepreneurs typically make because the franchisor has already perfected daily operations through trial and error.

Reputable franchisors conduct market research before selling a new outlet, so you’ll feel greater confidence that there is a demand for the product or service.

Failing to do adequate market research is one of the biggest mistakes independent entrepreneurs typically make; as a franchisee, it’s done for you. The franchisor also provides you with a clear picture of the competition, and the ability to differentiate yourself from them.

Finally, franchisees enjoy the benefit of strength in numbers. You’ll gain from economics of scale in buying materials, supplies and services, such as advertising, as well as in negotiating for locations and lease terms.

By comparison, independent operators have to negotiate on their own, usually getting less favourable terms. Some suppliers won’t deal with new businesses or will reject your business because your account isn’t big enough.

Franchise or Business Opportunity?

Business opportunities are less structured than franchises, so the definition of what constitutes a business opportunity isn’t easy to pin down.

In essence, a business opportunity is any package of goods or services that enables the purchaser to begin a business and in which the seller indicates that they will provide a marketing or sales plan, that a market exists for the product or service, and that the venture will be profitable.

Here are other key factors:

  • A business opportunity doesn’t generally feature the seller’s trademark; a buyer will operate under his or her own name.
  • Business opportunities tend to be less expensive than franchises and generally don’t charge ongoing royalty fees.
  • Business opportunities allow buyers to proceed with no restrictions on geographic market and operations.
  • Most business opportunity ventures have no continuing supportive relationship between the seller and the buyer; after the initial package is sold, buyers are on their own.

The Pros

advantages-of-franchising

The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many: Brand awareness, uniformity in meeting customer expectations, the power of pooled advertising and the efficiencies of group purchasing.

For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business programme has already proved to be successful in the marketplace; the use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognise; and the advantages of group advertising and purchasing make operations more profitable.

Related: Alternatives To Franchising

In addition, ongoing training creates an instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally.

Operating a successful franchise may quickly lead to building a second and then a third business, and so on. Fortunes have been built this way.

The Benefits

  • Reduction of risk
  • Turnkey operation
  • Standardised products and systems
  • Standardised financial and accounting systems
  • Collective buying power
  • Supervision and consulting readily available
  • National and local advertising programmes
  • Point-of-sale advertising
  • Uniform packaging
  • Ongoing research and development
  • Financial assistance
  • Site selection guidance
  • Operations manual provided
  • Sales and marketing assistance.

The Cons

franchise-disadvantage

Franchising, however, is not for everyone. Fiercely independent entrepreneurial types (you know who you are) may chafe under the strict operational requirements and specifications of a franchised business. If things have to be done their way, you may want to head in another direction.

Also know that some franchise systems are better than others. A weak franchise programme will not train you well to handle the challenges of the business, will not do a good job of assisting you when problems arise, and will not make the best use of your advertising dollars.

The Downside

  • Loss of control
  • A binding contract
  • The franchisor’s problems are also your problems.

If you’re considering buying a franchise, don’t let wild expectations influence your decision. While franchising is designed to put people into business who have never owned a business before, the excitement of ownership can create an impulse to move forward without proper planning.

If you rush headlong into buying a franchise expecting to boost your current working salary, but the earnings don’t allow you to pull out more than half your former salary, you will be one unhappy camper.

Work with a good accountant to prepare a cash-flow projection for the business before you take the plunge. Know how long it will take to break even and turn a profit, as well as the amount you’ll realistically be able to pay yourself.

Associated Costs

In terms of capital investment, your franchise fee will be determined by the profitability of the business. Most companies have a scale when it comes to franchise fees. They can have varying ranges, anywhere from R10 000 to R500 000+, depending on the size of the system.

Related: Signing Up With An Emerging Franchise

In addition to this front-end franchise fee there is, the one-time fee that a franchisor charges you for the privilege of using the business concept, attending their training programme, and learning the entire business. There will also be an ongoing royalty fee, typically ranging from 2% to 10%, or a monthly figure.

Some of the other costs associated with a franchise include:

Facility/Location

In some cases, you may also have to buy land or a building, or you may have to rent a building. If you rent a building, you’ll be responsible for not only the monthly lease but for the one-time deposit as well. In addition, you’ll have to pay for leasehold improvements. In some cases, the owner of the building will put these in and factor them into your rental, probably charging you a small additional fee.

Equipment

Different types of businesses will need various pieces of equipment. There are generally long-term payments available for most equipment purchases. Fortunately, most banks will provide loans for equipment because it also serves as collateral.

Signs

Outside signage can be very expensive for the small-business owner. Most franchisors have developed a sign package that the franchisee is obligated to purchase.

Opening Inventory

This will usually consist of at least a two-week supply, unless you’re in a business that requires a much more complicated inventory. Most franchisors will tell you what their opening inventory requirements are.

Related: How To Choose The Right Franchise

Working Capital

For rent, you may be required to deposit the first and last months’ payments as well as a security fee. You’ll need some working capital and money in the cash drawer to make change.

You’ll need money to pay your employees. You’ll need money just to operate until there’s a cash flow. If you’re buying a franchise that relies on charge accounts, you’re going to have to allow yourself some additional capital before the bills are paid by the customers and returned to you.

Advertising Fees

There is usually a fee for advertising on a regional or national basis. Larger franchisors often require their franchisees to pay a certain amount into a national fund used to advance the concept. The upside is the benefits are quite substantial in terms of the visibility you get with the type of advertising that most franchisors do.

Apr 7, 2016
GG van Rooyen is the deputy editor for Entrepreneur Magazine South Africa. Follow him on Twitter.