Buying a Franchise
Starting a business venture can be a risky proposition. In the first two years of operation businesses often fail for a number of reasons ranging from insufficient cash to a lack of management skill in a particular business area. Recent statistics show around 50% of businesses do not last until their 5th anniversary. For first time business owners the statistics are higher so it is crucial you do you research when buying a franchise.
For first time and even second time business owners buying a franchise offers a great alternative for starting a business. Buying a franchise is a great way to de risk your business startup, for a number of reasons including:
- 1. Proven System – Buying a franchise is buying a tested and proven system. Not all franchises are created equally in this department, but ones with a larger number of locations have figured out the business in great detail. By buying a franchise you are buying the license to copy their model.
- 2. Known Brand – When starting your own business there is a great deal of marketing and promotion that goes into building a brand. In buying a franchise business from a franchisor (Company that owns the brand and business system), you are buying the right to use a brand with strong public recognition.
- 3. Market Research – In buying a franchise business you have a whole team of professionals from the corporate end of the business who help you get your business off of the ground. The market research team will do all of the due diligence surrounding site selection, and know generally what works. Depending on the agreement the franchisor may buy the site and your business will rent it back.
- 4. Training – One of the major reasons small businesses fail is because the owner/manager does not have the skills necessary to properly run the business. When buying a franchise business, the franchisor has mandatory management training courses that everyone buying a franchise must take. This ensures you fully understand how to run your new business successfully.
- 5. Lower Costs – In most cases for when buying franchises with a physical location the rent and most other business inputs (IE food) are available at much lower rates than if they were negotiated by you and bought through regular distribution channels. This is because the franchisors real estate team, and procurement team negotiate these contracts in bulk.
- 6. Professional Marketing – As a franchise business owner you have access to a marketing team to design and execute national campaigns. This means your business can buy and be featured in media it would not be able to afford (Television for example) if you were a one off small operator.
- 7. Exclusive Territory – Generally speaking most reputable franchisors will agree not to put another operator within a certain radius of your new business. If the business does not have a physical location because it is something like a cleaning service, generally there is an exclusive territory where only you can take orders from customers under the brand name.
The attractive nature of the franchise business model causes some operators in the marketplace to attempt to market their other ventures, systems, and schemes as franchises. In reality many of these systems are just recruiting sales people to be self-employed on commission, without the benefits and support of the franchise system. Two business models that often try to be seen as franchises are: business opportunities, and multi level marketing (MLM) or direct marketing schemes.
Differences between a Franchise and a Multi Level Marketing or Business Opportunities
Perhaps the most important difference between a franchise and a business opportunity is the cost. Franchises are much more expensive, for two major reasons. Generally your business gets a lot of support from a franchisor to ensure it succeeds. The second reason is the equity built in the franchise business you buy, in most cases subject to the candidate being approved by the franchisor you can sell the business. There is also generally a clause that allows the business to be sold back to the franchisor at fair market value.
Business opportunities or multi level marketing schemes are generally a business in a box. Once you buy the kit you are on your own with no exclusive territory, and no real way to build equity in the business. Nobody will buy your business, because they could either start their own, or you could start again and take all of the clients. There is generally little to no support and training provided outside of what is included in the manuals that come with your package.
How do you know if it is a franchise?
It goes without saying franchises are a superior business to buy. But here are some surefire ways to tell if you are buying a business opportunity kit or a franchise:
- Franchises generally cost more and include more.
- Does the business operate under your name? Or the name of the brand. If it operates under the brand it is probably a franchise.
- Territories do not generally overlap and are exclusive.
- Continuing support and training is provided to ensure your business is a success.