Even though franchising per se is a sound business concept, there are good and bad franchises – and a prospective franchisee needs to discern the difference between the two.
Since choosing a franchise is a major decision, a prospect has to consider many factors before taking the final plunge. Initially, however, he should first list down his preferences, personality traits, and management style. He should go into a business that matches who he is, and how he runs things. He must also study the existing franchises in his area so he could decide if he wants to put up an additional outlet of a company that already has several franchises there or venture into a new one. Finally, he can start to consider the terms of each franchise.
It is necessary for any prospect to conduct a research on existing franchises of the brands he is considering to inquire about their problems, financial viability, and level of satisfaction with the franchise. The feedback that he will get will get can serve as a major gauge on the viability of the business.
A good franchise offers a total package that ranges from start-up assistance to post-opening support for a reasonable fee. There are several points to look for in a good franchise. The brand must be known to the prospect and must be have the potential to expand further. The track record of the franchisor must be good and the franchise fee is reasonable. The projected level of profitability must be supported by facts i.e. the net income of existing franchises, to have an assurance that the investment will be recouped within a reasonable period. Because the investment is lower than a non-franchise business, the Return on Investment should be significantly higher.
The franchisor must be seriously committed to the success of their franchises. The franchisor-franchisee relations should be strong. The existing franchisees should be satisfied with their business and the marketing programs that the central management implements. The organization must be structured in such a way that the roles of each unit are clear and well delineated. A highly organized company maintains an efficient system that maximizes the use of time, energy, and human resources to save money and thus boost profits. In a structured company, the problems in day-to-day operations are greatly reduced because everything is expected to run like clockwork.
The market research must be extensive enough to maintain and continuously strive to improve the profitability of all the franchises. Good franchisors are always on the lookout for potential opportunities to further improve existing strengths and address the problem areas strategically. They know how to respond to market changes quickly in order to stay ahead of other businesses.
The performance of each franchise is studied from time to time. The training that the franchisor provides must be sufficient for start-up operations and running the business, and projected for the long-term stay of employees. In addition, the support of the central management should be adequate to assist the franchisees in handling the problems that may be encountered in running their outlet. This shows that the franchisor is dedicated to maintaining the integrity of its brand in all aspects of the business. Continuous support from the franchisor also lessens the possibility of any of the franchises ruining the reputation of the brand.
Lastly, a good franchisor strictly adheres to all the terms of the franchise agreement. The products and services that are offered through the franchisor must be of high quality and are delivered promptly. This strengthens the relationship between the franchisor and its franchisees.
On the other hand, bad franchises are generally short on training, support, and expertise. More often, these are the lesser-known brands that have little to lose in the event the franchise is unsuccessful. They do not have an established track record to speak of and may therefore fall short on experience and expertise to help run a successful franchise. They may demand an unreasonably large amount as franchise fee to give the impression that they are as good as the more popular franchises and provide the same intensive training and support. Prospects need to be aware of unscrupulous people who may only be after making an instant profit easily by deceiving a prospect with promises of projected profits. Some companies may draw up a franchise agreement that is as good as that of bigger, more successful companies but due to their meagre resources and little or non-existent expertise, they may not be able to implement the agreed terms to the satisfaction of the franchisee. This is the very reason why conducting a research on existing franchises is very important.
A bad franchise promotes products and services that are seasonal. Prospects also have to stay clear of companies selling fake products such as those that manufacture and market imitations and pass these on as, for example, Class B originals. This is punishable by law.
Some companies, aware of the popularity of franchising, may take advantage of its attractiveness and offer franchises left and right, without regard for viability, and concerned only with selling as many franchises as possible.
In case a company is just starting out to franchise their brand, prospects need to be wary and take more time before committing. It may not necessarily be a bad franchise but nobody wants to be part of a test run.