For many years now, one of the key questions facing prospective franchisees has been: which is better, a job or a franchise? It is often a difficult decision because there are pros and cons to each option.
Today’s market has introduced a new wrinkle to this question, as many unemployed people are discovering that the only way they can find work is by accepting ‘underemployment.’ Underemployment has always occurred to some degree whenever the economy comes out of a recession. When there are numerous seekers for every job offering, employers tend to increase qualification requirements and lower compensation. It’s simply a reflection of the law of supply and demand.
As soon as enough people get back to work, the number of applicants is reduced and market forces tend to correct the situation. This usually happens fairly rapidly during a recovery, because most recessions end with a significant surge of new economic activity and job creation.
But today’s market seems to be quite different in this critical area. We’ve all been told for some time now that the recession has ended. There’s no doubt that this recovery seems stuck in a position where underemployment rules the day. We are seeing increased economic activity, but not a significant surge in job creation. In many cases, unemployed people are accepting positions that pay considerably less than they made previously, that do not offer benefits, or that are only temporary contract positions.
In this climate, the question of whether to choose a job over a franchise changes, because the arguments, both pro and con, shift considerably.
The greatest advantage of a job has always been the perception of lower risk. The usual assumption is that a job guarantees a good income in exchange for a well defined work effort, with little risk of losing the job unless the employee decides to quit. Most people are naturally attracted to the promise of economic safety.
But times have changed and these assumptions need to be re-evaluated. If the compensation and benefits are lowered significantly, or if the continuation of the position is in doubt, the safety normally associated with choosing the job option is considerably lessened. In this market, many people are coming to believe that what they once viewed as the safe option is in fact little more than an illusion.
Considering a Franchise
The advantages of a franchise, on the other hand, have always been threefold. First, it is assumed that the business will produce a significant income, though the owner will typically have to work very hard building the business before this income becomes a reality. Second, the business will create wealth through excess cash flow, and this wealth can be realised some day through the sale of the business. Third, there are significant tax advantages available to franchise owners that are not available to regular employees.
Once again, changing times mean these assumptions may no longer be so reliable. Many businesses are struggling and even failing in today’s marketplace. Some franchises that were considered safe and dependable investments three years ago have now become high risk ventures.
Though the advantages of franchise ownership can still hold true in today’s market, a prospective franchisee needs to be far more careful in selecting the right opportunity. The adage that an ounce of prevention is worth a pound of cure applies more than ever when it comes to investigating and choosing a franchise. Verify all your assumptions and make sure you determine exactly how the business has done during these hard times. Taking the time to do this right can pay huge dividends to a new franchisee.
For a person who uses this level of care in the investigation process, the safer and more secure course may in fact be a franchise business rather than a job. The reality of chronic underemployment in this recovery has become the game changer for many who are evaluating their plans for the future.
“Should I Look Into An Established Or Emerging Franchise?” – 3 Factors To Consider
Choosing a winning franchise is crucial for your first big business investment. You need to weigh up the benefits and drawbacks of sticking to a recognised name or investing in a trendy newcomer.
If you had to choose between opening up a McDonald’s or a RocoMama’s, what would your choice be based on? One’s global, while the other is local, yes – but one’s also been around longer and would therefore be your safest and more profitable option, right? Not necessarily.
Franchising experts suggest you consider several franchise opportunities before deciding on the one that’s right for you. The challenge is to decide on one that’s of interest to you and makes investment sense.
“While joining a franchise with an established track record can be beneficial,” SME Toolkit South Africa reports.
“An emerging franchise gives you the chance to get in on the ground floor of what could be a highly profitable growth opportunity.”
Here are a few other considerations to make before taking the plunge:
1What’s in a name?
Everyone knows the ‘golden arches’, the grinning face of Colonel Sanders or the black and red rooster. “When it comes to choosing between different sizes of franchise systems, one of the most important factors can be brand recognition,” notes Jeff Goldstein of Goldstein Law Firm.
“The ability to instantly benefit from a known brand is a key benefit for many new franchisees, because the business will generally be stronger with a larger, more-established franchise system.”
But if you’re looking to build a brand as opposed to joining it, a smaller franchise could be your match, says Terry Powell, whose company, The Entrepreneur’s Source, helps individuals find the right franchise concept for themselves.
“Early franchisees get to be part of the development and have their ideas listened to, while established brands just want you to follow the programme,” says Powell.
2How much help is offered?
Training sessions, extensive manuals and national marketing campaigns are part and parcel of joining a big franchise. Understandably, this could appeal to the newbie in you, but wouldn’t you rather receive more attention as an early-stage franchisee – “Where your success or failure may have a much greater impact on the franchise system as a whole,” Goldstein says.
If it sounds like too much pressure, perhaps intensive training would suit you best. If however, you’re more independent and have a little more business acumen, you could contribute a lot more to the franchise than you can imagine.
3Show me the money
New franchises will typically have lower joining, royalty and marketing fees. But you also need to consider the emerging franchise’s financials before looking at your own.
“As with any investment, there are liabilities to being an early adopter,” says Brent Dowling, COO at franchise consulting company, RainTree.
“Without a track record of success in different markets, there is the risk that the brand just isn’t as replicable as predicted,” says Dowling.
Also remember that it may take a while for emerging brands to reach what Powell calls “the stage of critical mass”, when growth begins to happen more rapidly and exponentially.
So, are you in it for a quick buck or the long haul? The answer to that question could help you choose your very first and best franchise investment.
To Franchise Or Not To Franchise? Which Will Be Right For You
Before taking the leap of handing over operations to several store owners, consider this.
Whenever I meet with an entrepreneur interested in franchising I ask, “Where do you want to be in five years?” Perhaps unsurprisingly, most entrepreneurs have never given any thought to the question before. But to determine which growth strategy is best, I need to understand three things: Their personal goals of ownership, the assets (both human and capital) they can devote to achieving those goals and the time frame within which they hope to accomplish them.
Armed with that knowledge, the strategy you will choose is often just a matter of plugging in the numbers.
Business owners often tell me they want to grow as fast as possible without sacrificing quality. But that’s just an ownership philosophy. In order to use goals as a foundation for your decision-making, they must be concrete, measurable and tied to a specific time frame.
Consider the long-term over temporary glory
I encourage my clients to start by asking ‘lifestyle’ questions:
- Do you want to still be working in the business in five years?
- Do you want to sell the business?
- Are you looking to pass this company onto your heirs?
- If you are looking to cash out, how much money is ‘enough’ — not only for the time and effort you will have devoted to developing the business, but for you to move on with the next phase of your life?
- If you want to hold on to your business, how much would you like to be earning at a certain point in the future?
When you ask yourself how much you want for your business when you sell, it is important that you do not ask how much you think it will be worth.
Valuation should not enter this process until later. Instead, ask yourself where you want to be personally. Do you want to retire? If so, do you want to be living on your private island collecting shells? Or would you be happy on a golf course somewhere? Or do you want to open a new business and move on?
Once you have painted the picture in your mind of where you want to be, you should ask yourself how much money it will take for you to achieve that goal.
Money makes the franchise go round
Next, let’s talk capital. Franchising is a low-cost means of expansion, but it isn’t a no-cost means. If you go into a business undercapitalised, you run the risk of taking a nine-foot leap across a ten-foot ditch. In addition to the costs of developing appropriate strategies, manuals, marketing materials and legal documents, you will have costs associated with franchise marketing and franchise sales.
If you don’t have the capital needed to properly support your franchisees, you increase your risk of franchisee failure, difficult franchisee relationships and litigation.
In franchising, there are three ways to capitalise on your initial development efforts:
- You can have the capital (or access to the capital through lenders or investors) when you begin franchising.
- The cash flow from your company-owned operations to fund your entry into franchising can be used.
- Try financing your franchise efforts out of your initial fees and/or product sales — although that’s considered a ‘worst practice’ in franchising, because it often encourages franchise sales to unqualified candidates.
One of the most critical things to remember when making the decision to franchise is that you are creating a new business — not simply an extension of your existing business. Regardless of the business you first founded, you need to understand that franchising is the business of selling and servicing franchisees. And your first and most important priority in that business must be to make your franchisees successful.
Related: 3 Secrets To Franchising Success
There’s an old piece of wisdom floating around the franchising world, and it goes like this: You can’t franchise unless you have at least two operating units. As you explore franchising, some people may tell you that. But they’re wrong.
The entrepreneur who spent a year opening his second location would have two operating locations and could now offer franchises with the expectations of a 2,2% close rate.
In contrast, the entrepreneur who spent a year franchising with a lower, 2% close rate would have one corporate location but perhaps 10 franchise locations — allowing her an even higher close rate, more publicity and a faster jump on competitors.
Two (or more) is better than one location
Once an entrepreneur decides to franchise, they sometimes wonder if they can open more company-owned units. The answer: Yes, absolutely. And depending on the company, that may be a valuable strategy.
The vast majority of franchisors use both company-owned and franchise strategies in combination. Some franchisors will choose to own and operate the best locations or markets while franchising secondary and tertiary markets.
Others will choose to develop a company-owned presence in their core marketplace and franchise in more distant markets. And some treat company growth and franchise growth opportunistically and end up with many markets that have both franchise and company-owned locations.
Regardless of the strategy taken to integrate these two growth models, for many companies, the combination of franchising and company-owned growth provides the best of both worlds. From a purely financial standpoint, it’s almost impossible to beat.
The excess cash produced by your successful franchise operations can fuel increased franchise growth, but at a certain point, the cash used for franchise lead generation will outstrip your opportunities to spend it wisely on franchise marketing. Reinvesting in corporate locations can improve your cash flow and build your balance sheet.
Before taking the leap…
If a franchise keeps its expenses in check, it can be profitable and recapture its initial investment by selling a single franchise. Its only incremental expense will be the sweat equity it invests in the franchise programme.
If you are still seriously thinking of franchising, think hard about what it means for your business, and for you. It’s a big decision.
Ask yourself the following seven questions right now:
- Is my business franchisable?
- Do I need to franchise to achieve my personal goals?
- What is happening in my marketplace?
- Will I be committed to the success of my franchisees?
- Do I have adequate resources?
- Do I have the intestinal fortitude to do franchising right — even if it means not selling a franchise to someone I believe will fail or will not meet brand standards?
- Do I have the fire in the belly to make this happen?
The ultimate answer to whether or when you should franchise cannot be found in any magazine, nor can it be provided by a consultant, an accountant or an attorney.
It doesn’t matter if the market is ready, or if the concept is ready. The answer to this big question can be found only within yourself. So it’s time to ask: Are you ready?
Present vs future business goals
Next, determine where your business is now:
- How well-defined is the concept?
- How much money is it making, and what is its current value?
- What are its financial and human resources?
- How strong is the management team?
- Is it ready for expansion?
Once you have answers to these two variables, you can measure the distance between your current reality and the goals you have set. That distance, combined with an understanding of your goals, capabilities and time frame, will dictate your strategy.
Is Franchising A Fit For You?
Here’s what you need to keep in mind when considering becoming a franchisee.
The very essence of a franchise is consistency. If you’re not happy to follow someone else’s blueprint, you may be better suited to a different type of venture.
If you’re thinking about getting in on the franchise game, you may believe that your biggest question would be whether to open a fish & chip shop or a car wash. But the real question is whether you should buy a franchise at all.
While franchises are growing in popularity, the sad reality is that many people enter into franchise agreements thinking it’s a fool-proof plan for success. But the fact is that franchises still fail.
A lack of proper screening by the franchisor, combined with a general lack of awareness by the franchisee are large reasons for this.
Franchising isn’t something that should be rushed into. Unlike small independent businesses, which can often be started with minimal capital and then scaled organically as the company grows, franchising generally requires a significant up-front investment. Then there’s the fact that many franchises don’t show a profit for the first year, and preparing financially for this situation is something that franchisees often overlook.
If you’re considering franchising, it’s important to seek out information from independent, unbiased sources and make sure you look into the risks and benefits objectively. Taking the time to conduct thorough research and becoming well-informed can help to mitigate a number of problems right from the start.
Here are a few questions you should ask yourself before you embark on this journey.
Do you know what you’re in for?
First and foremost, make sure you have realistic expectations. Franchises are a ‘business in a box,’ and you’re buying into an already-successful business model, but that doesn’t mean that it’s going to be all smooth sailing, and it certainly doesn’t imply that it will be easy.
In order for your franchise to be a success, you’re going to have to put just as much work into the venture as you would when starting an independent business. Make sure you’re willing to put in the time and effort before you start.
Are you willing to follow the system?
Franchises are systems-based businesses, and in order to find success as a franchisee, you have to be prepared to stick with the system. The very essence of a franchise is consistency. If you’re not happy to follow someone else’s blueprint, you may be better suited to a different type of venture.
Are you a people person?
Do you work well with others? Franchising means spending a significant amount of time interacting with your franchisor, fellow franchisees, customers, employees and vendors. So great interpersonal skills are a requirement. If you find dealing with others to be drudgery and don’t have a track record of great relationships, you’ll want to pass on being a franchise owner.
Can you afford it?
Buying a franchise because you need a job is one of the worst reasons to start a franchise. Franchises are expensive, and require a significant amount of funding up-front before you can get started.
You’ll have to cover the start-up costs, and have enough capital to fall back on until the franchise begins to make a profit. In many cases, this is at least a year.
You’ll want to make sure you have enough reserves to cover operating costs and living expenses during this time.
Will you enjoy it?
Finally, the all-important question: Are you sure that owning a franchise is something that you’ll genuinely enjoy? While being a franchisee can be a great opportunity for some people, for others, it’s a terrible idea.
Related: Alternatives To Franchising
Most franchise contracts run five to ten years — that’s a long time to be locked into a job you hate. If you don’t relish the thought of following someone else’s system and immersing yourself full-time into running a business, franchising isn’t for you.
Still think you have what it takes to be a franchisee? Great! Before you dive in though, you’ll want to make sure you’ve learnt everything you can about franchising, and thoroughly understand what you’re getting into. Take things slowly and do your research.
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