The European Franchise Federation estimates that there are over 15,000 franchise brands across Europe. The three leading countries in franchising are Turkey, France and Spain. Every year the number of franchise brands grow by around 2%. Therefore, the market becomes more competitive over time. When signing a contract with a franchisee, entrepreneurs invest in a quality product with a reliable management and proven business-model. A good franchise contract is a recipe for success: 80% of companies working on a franchise contract surpass the 5-year lifetime on the market.
If you are entering the franchise business, this article will help you to take the first steps and avoid difficulties.
- What is a franchise and should I consider it?
- How much does a franchise cost?
- What will be the ideal franchisor for me?
- What do franchisors look for in an investor?
- Getting started step by step
The main idea of a franchising business is to share a singular business-model, thus, expanding the market share of a particular brand.
First things first, in a franchise both the owner of the brand and the investor share in the profits. Next, your risk level of opening a franchise compared to a start-up business is dramatically lower. The reason being is that many new businesses fail in the first year since the opening. This is usually due to numerous reasons such as bad management of the business, high competition in the market and lack of potential customers in your area. Meanwhile, a franchise is already an established successful business that is making profit in a suitable environment. Again, acquiring a franchise lowers the risk of failure.
The first thing a beginner entrepreneur should get to know is the size of the lump-sum payment. This is a one-time payment for entering the network. Perhaps your financial opportunities will help you make a choice among the wide variety of offers. One of the most popular fields for franchising is the food and beveage industry (approx. 21,3%) and retailing (approx. 15%). The most popular brands in Europe are 7-Eleven (60,000), McDonald’s (36,500) etc. Most of them originate from the USA. The lump-sum payment varies from $500,000 to more than $1million. However, if you’re not ready for such expenses then the most suitable option for you will be buying your local brand franchise.
You should consider the first payment is not always the whole sum you’ll have to invest. Sometimes, it’s 10-20% of what you’ll have to spend until your business starts to bring income. After you launch the business the franchisor will take a set royalty – a fare for using the brand name. This can be either an interest from your sales or a fixed sum of money. Along with that you’ll have to make some initial investments which include rent pay, bills, salaries, advertising campaign and working capital.
Of course, the risk is reasonable if your franchisor guarantees you profitability. This leads to the next question: how to choose a reliable franchisor?
It is a rule of thumb that an investor is better off by analysing the market and trying to see the possible competition involved before deciding on what franchise to choose. If there are too many fast food restaurants in a small area, then investing in a fast-food restaurant may not always play out well. This is why you should take your time when looking for the perfect franchise. After you have decided with the field of your franchise and made all the needed research, it is important to examine the following:
You initially have to decide on what your budget is for a franchise. Don’t spend all your money on the lump-sum payment because you’ll have to make some further investments. Some franchises offer a first partial investment from the total cost. You then pay out the rest of the cost of the franchise as the business grows and brings you profit to use as pay-out. In other words, the franchise pays itself off with the profits. But you have to consider the risk involved.
2. Credibility and Brand Reputation
Credibility and brand reputation are major factors when choosing a franchise within a given budget. It is important to make sure that you invest into a credible brand with no ‘strings attached’. Thereafter comes brand reputation. It is the base of your potential revenue. Ask for the feedback from current franchisees. Pay attention to details like license fees, support system, freedom of choice, possible penalties, etc. The better the reputation the greater the financial opportunities are, when established.
3. Franchise package offer
All package offers can be conditionally divided into three types:
- Low-cost package. Franchisor offers you licenses and agreements allowing regulation under the brand name, the description of strategy and business-model. It usually includes discounts from some suppliers.
- Middle-cost package. Add staff trainings and consultations to the above
- Full set package. The franchising company helps with hiring people and buying all the necessary equipment.
It’s not always a pick ‘n choose game for you. Sometimes the tables turn. The investor also gets a say whether they are willing to work with you, so you have to recommend yourself and show your potential. To appeal to the investor, it is usually preferred to have the following qualities:
- Commitment to the brand
- Ability to adapt
- Knowledge of running a business
- Knowledge of the industry
- Good financial background
You should keep in mind that franchise businesses often don’t leave much space for one’s own creativity. You will have to meet the corporate standards. You also probably will not be able to sell your bid to any other entrepreneur.
- Do the research. Check what products and services are in demand - how is the situation on the market looking like in regards to the products and services.
- Choose a brand that you would like to cooperate with.
- Review the agreement. Ask for a sample of the contract. Be sure to check all the details being offered to you. Get feedback from colleagues who are already in the same network.
- Plan out your budget. Don't forget to stock up some extra money for unpredictable expenses.
- Discuss all the details with the franchisor and decide if you are ready to enter the business.
Interested in starting a franchise but have no idea about costs? Let's talk numbers.
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