Business Franchise

So, in the previous post I expressed my opinion about necessity to evaluate the idea before starting a business even if you were buying a franchise. Many people forget about it. They think that if the franchise chain has many franchisees and they operate with profit the new business also will be a success. But as there no identical children there are no identical markets and businesses. Information from other franchisees is useful but not sufficient to make such an important decision.

Last post was dedicated to market demand as a factor influencing franchise idea. Now I want to speak about the others.

The second thing to evaluate is competitiveness of goods and services your business is going to sell. You need to study the market competition as serious as possible. Visit the shops or restaurants of competitors – both franchise and non-franchise. Listen to what people are saying about their products. As a result of your survey you need to become sure that you product has real advantages over theirs. If not - I suggest you not to buy this franchise for this market. Think about other idea or maybe other region.
What advantages can be considered as real and competitive? Certainly, there are a lot of them. Here I’ve listed the main:
-price;
-discounts and possibility to get them;
-quality;
-technical and economic operation factors;
-prestige of a trademark;
-convenience of packing;

-guarantee period and conditions;
-post-sale support and services;
-reliability;
-payment terms;
-credit conditions;
-advertising and other promotion activities;
-delivery services and so on.

The next factors require some economic calculations. I mean that you need to decline an idea if capital investment is too high and/or economic efficiency is too low. I plan to dedicate a special article to economic efficiency in future. Here I’ll only say that you need to be sure that future profit will cover initial investment in not more than 5 years (in general) and your personal income has to be greater than interest you could get for your personal savings.

Also the idea must be considered as unfavorable because of high risk factors. Thinking about risks you need to take all of them together and consider their probability.

Ooh! Only three more factors remained… I need to have a break… and will continue in the next post.

Today I was a witness of the dialogue between two students. They are 14 or 15 and were discussing how they would start their future businesses. I hope they will not have objections if I present a part of this dialogue here.

“I’m thinking about IT business. It’s the easiest… and the sphere is growing”
“Do you have an exact idea? E-commerce?… ”
“I don’t know. I think to take the list of franchises and will choose the one with the best program or the least investment…”

I wanted to interfere but decided to stay away and to express my opinion here.
I’m absolutely sure that it’s necessary to study a franchise program before investing your personal or borrowed money. But I think that studying the idea itself is more important. If you choose a franchise with an attractive program but the idea is not OK for your region or your country the result will never satisfy you. And it’s not necessary to be a prophet to say that to avoid bankruptcy you’ll have to invest more, to work harder and so on.

What factors can make an idea having no prospects? I found some and want to express my opinion with the potential readers of my blog.

At first I need to mention the demand for the product. You need to take into consideration as many as possible factors that influence the willingness and ability of people of the concerned territory or country to buy these goods and services. It’s not too hard if you live in this region yourself. You can spend some time listening to people’s complaints. You can ask your friends and neighbors. It’s not necessary to carry out a marketing research if you are planning to start a small business company. (Certainly if the matter concerns a big investment and large company it’s better to order a marketing research from professionals).
The factors you have to think over vary for different ideas and different markets. I’ll say some words about the most important ones as I think.

So, the first one is geographical, historical, religious and cultural traditions that prevail on the concerned market. I’ve read a story about McDonalds’ franchise in France (unfortunately it was some years ago and I can’t recall the source). It was a sad story. The idea almost collapsed because of cultural food traditions in the country. The author of the article explained that historically the French were in earnest about food. And the idea of fast-food itself was offensive for them. But if to add that the French have no special liking of American life style we’ll get the complete picture of extremely bad idea.
But at the same time the same franchise idea (I mean McDonalds’) became enough profitable in Japan. Why? Because it was absolutely uncommon for Japanese and was taken by them as something interesting, and unusual, and modern.

The next factor that influences demand is size and growth of the target market. It includes the number of potential buyers. Thinking about buyers you have to study their tastes and preferences on the one hand. Also you need to study buyers themselves: age, income, sex, life style and so on. You need to study their attitude to your idea before you start your business. By the way it will help in future while planning advertising and promotion activities.

Also it’s necessary to think about seasonality of demand. If sales change greatly during the year it means that your personal income will change too. Sometimes you’ll get nothing at all. Usually you’ll have to invest more money in inventory when demand goes down. Are you ready for this?

OK. That’s enough for demand factors for the first time. Read my next post to answer what other factors can make a franchise idea having no prospects.

Franchising was developing rather fast during the last decades. Why does this happen? As most tendencies in the global economy this one is not exclusion: somebody gets benefits from it. Today I decided to write a shot summary of benefits and potential losses faced by franchisor, franchisee and their clients.
 

Benefits for a franchisor:
1. Opportunity of fast expansion of target market, growth of sales;
2. Entering new territories and regions (or even countries);
3.  Opportunity to decrease or even eliminate some types of costs: costs for vertical administration, hidden costs caused by difficulties in large company management;
4. Lower capital investment;
5. Government control over the franchise agreement;
6. Promotion of a company itself, its trademark and brand; growth of company’s recognizability among clients; increase of confidence in company’s quality and range of goods and services;
7. Getting money from selling licenses and receiving royalties;
8. Profit from leasing real estate and equipment to franchisee;
9. Profit from giving credits to franchisee;
10. Decreasing costs while operating on whole-sale basis and decreasing turnover period.
 

Potential loses of a franchisor:
1. Getting less profit from franchisee’s enterprise in comparison with own enterprise;
2. Franchisee can influence the franchisor’s reputation. This is a risk factor;
3. In many cases it’s difficult to control the accuracy and reliability of financial reports of franchisee;
4. It’s difficult to find a reliable franchisee with good business and financial background;
5. While providing training for the franchisee, franchisor creates a potential competitor for himself.
 

Benefits for a franchisee:
1. Opportunity to start his own business with the minimum initial capital and with the professional support from an experienced franchisor;
2. According to franchisor’s program franchisee can have access to credit resources;
3.  Getting all possible benefits from franchisor’s brand, trademark and reputation; the same about marketing campaigns and PR activity (it’s very important that you get these benefits immediately after sighing the franchise agreement);
4. Opportunity to get access to the results of different surveys, research and development activity of franchisor for a minimum fee;
5. Opportunity to start business without any professional background because of well-prepared and already tested training program provided by franchisor (but it’s rather risky as such franchisee can loose in competition with more qualified businessman);
6. Guarantee of stable relations with suppliers;
7. Opportunity to purchase some equipment from franchisor on a leasing basis or for a depreciated cost.
 

Potential loses of a franchisee:
1. Franchisee has less independence; he can’t be “his own boss” as franchisor controls many spheres of the business;
2. Franchisee depends on the reputation of franchisor; problems in the main company will influence the whole chain;
3. As franchisee pays royalty and other fees to franchisor the costs increase and franchisee can become uncompetitive in comparison to independent small and medium-size companies;
4.  Franchisor can sell his business and a new owner can be less professional, the total policy of the company may change and so on; it’s a risk factor;
5. Franchisor can miss some essential changes and improvements in technique, market conditions and others factors that influence general activity of the company; it will influence the whole chain: every franchisee can loose his competitiveness.
 

Benefits for a consumer:
1. In most cases goods and services sold by every company in a franchise chain have the same quality and provide the same infrastructure; it’s rather convenient (especially when you need to travel a lot) as you don’t need to adopt your life style to new city or even country;
2. If the particular franchisee closes his business consumer can easily turn to the main company; franchisor usually provides the list of the other closest offices;
3. The franchisee’s quality is usually higher comparing to independent companies; this happens because of strict control from the franchisor’s side.
 

Potential loses of a consumer:
1. Franchising in general can decrease the competition in the market; this leads to higher prices and lower range of goods or services;
2. The professional education and experience of the particular franchisee can be less than necessary but it’s impossible to know this as every company in the chain uses the same trademark, marketing strategy and etc.