Basics of Buying a Franchise
Planning to run your own business? Getting a franchise is a good start. With an established brand and proven business model, buying a franchise is an efficient way to get a headstart in running your business. Here are the basics that will equip you in considering a franchise business model.
Buying a franchise in a nutshell
It works like this—you enter into an agreement with a franchisor, also known as the parent company. The agreement allows you to use the parent company’s trademarks, intellectual property, and brand name for your business.
You will be required to pay a franchise fee. This is usually an upfront payment that will give you the right to use their brand, business model, and trade secrets. As your business grows, you will continue to receive support from the franchisor as you make regular royalty payments, typically a percentage of your total sales.
You won’t need to spend long nights planning and developing effective business strategies. As a franchisee, you’ll get all the help you need to launch your business and watch it flourish.
Why a franchise?
1. Higher success rate. A franchise has a lower risk of failure compared to creating a business from scratch. Since the business formula has been tried and tested, you enjoy the security of a higher success rate. You will also benefit from the experience and sharing of best practices from fellow franchisees.
2. Low start-up cost. Starting a new business with a new brand can be costly; buying an established franchise with its business strategies already developed means saving both time and money.
3. Public recognition of the brand. You’ll save tons on advertising and marketing when a brand is already established.
4. Training and support. When you buy a franchise, you'll enjoy the support of your franchisor, especially in training your staff and the management team in running the business.
5. Growth opportunities. As a franchise owner, you could become a master franchisor for your area and sell franchise rights to other franchisees.
The typical franchise models
Before jumping into a decision, you need to understand the three types of franchising.
If you’re interested in creating a company branch, then this first and most common model—the business format franchise—is for you. The franchisor grants you the right to the brand, assists you in running your business (for example, identifying the office location, interviewing staff, conducting employee training, etc), and provides you with the necessary supplies (for example, McDonald's or Helen O’Grady Drama Academy).
If you’re just looking to sell and distribute products of a parent company, get a product franchise. Automobile producers like GoodYear Tires are into this. They manufacture the products, you sell using their brand.
A manufacturing franchise is a good option if you want to go into manufacturing. Coca-Cola, for instance, allows the franchisee to produce their bottle and distribute soft drinks using their brand. In this model, you’ll get the right to produce and sell a franchisor’s brand.
Have an idea on which type of franchise you are interested in? There’s still another thing you need to know.
Franchise, more than just a licence
Buying a franchise is more than getting a licence.
The term ‘licensing’ is also used in franchising, but it’s a different agreement. When you obtain a licence, you’re only paying for the brand’s intellectual property. A licensor does not assist in business operations. The licensor's concern is limited to the use of its intellectual property. Licensing is typically non-exclusive, which means the licensor can license multiple businesses within the same geographical area.
However, when you purchase a franchise, you’ll get support from the franchisor in running your business. You could also be an exclusive carrier of the franchisor’s brand in your area. You can think of your business as an independent branch of the franchising company.
A franchise opens up significant, lucrative opportunities for you. However, not all franchises are a smart investment. More than choosing the right brand, you need to understand the culture, goals, and values of the franchisor you want to work with to ensure growing success.