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Is a Franchise Business Model Suitable for You?

written by: N Nayab•edited by: Jean Scheid•updated: 8/18/2011

Franchisers tout advertising, reputation, and support systems as reasons to sign up to their business model. However, for all the benefits a franchise agreement brings, it also poses serious drawbacks and impediments. Signing up for a franchise requires a serious consideration of the bad and good.

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    Support System

    Franchises the Bad and Good Taking the franchise route provides the technology, and throws open a robust and reliable support system for the entrepreneur. The entrepreneur gains access to the franchiser’s back office operating systems, help from the public relations officer to issue press releases, critical inputs from the franchise manager hardened by the experience of managing hundreds of outlets in order to handle day-to-day challenges and issues, and more. Such support systems becomes invaluable help for new entrepreneurs or business owners with limited expertise, resources or support teams.

    The support systems and expertise come at a cost. The annual franchisee fees and other expenses can be hefty and take away a considerable portion of the profits. In return, the availability, reliability and effectiveness of the product knowledge, technology and support system, however, depends on the franchise. For instance, a newly established franchisee would hardly have the experience to add any value other than what any entrepreneur can do anyway. Some franhisors promise but never deliver. The availability of a support system depends largely on the track record, and entrepreneurs need to review what the franchisor promises, and talk to existing franchisees to understand whether the franchisor lives up to their promises.

    Moreover, such support systems come at the cost of freedom for the entrepreneur to manage the business. The franchise agreement imposes a series of dos and don’t’s, which tie up the entrepreneur’s hands, and in effect, makes him a franchisor's employee of sorts without any pay guaranteed.

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    A franchise business with a recognized name not only helps in providing greater credibility and visibility to the establishment, it also makes hiring quality staff easy. Established franchises also provide market awareness and brand name visibility that helps entrepreneurs save considerably on customer acquisition costs. Overnight, a franchise agreement provides the awareness and customer base more than a new business will have to slog for years to develop.

    However, the opposite may also hold true. The franchisee may have to endure the reputation of the franchisor and that reputation may not be desirable. Similarly, one franchisee rendering poor service elsewhere may have a negative spill-over effect on all other franchisees. In short, the franchisors' actions can make or break the franchisee. Do not assume that a franchisee agreement will bring in brand name and reputation by default.

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    Advertising and Promotions Efficiencies

    Franchisees contribute a percentage of the monthly revenues, say around two to five percent to the franchisor's advertising fund, and the franchisor, pooling all such funds, can launch a massive campaign and ensure country or area-wide visibility that individual operators cannot sustain on their budget.

    This, however, doesn't always hold true. The franchisor targets ad campaigns at a national level, and may not incorporate local factors or sentiments. For instance, the franchisor may place ads in newspapers that have a better circulation nationally, but the newspaper may be unpopular in the particular city or town. Similarly, the franchisor may design generic promotions, and the franchisee may not be able to leverage local festivals or events that may otherwise attract crowds.

    Success depends on how well or successfully the franchisee adapts or aligns with the franchisor's marketing and promotion strategy. The entrepreneur needs to study in detail, the franchisor's marketing strategy, and make an honest appraisal of whether it will work for the business before signing up.

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    Buying Efficiencies

    Franchisors provide a regular and stable source of inputs and raw materials. While this holds true, this need not necessarily be of any significant advantage if the raw materials and other products are easily available on the market elsewhere and at a lower price. In fact, at times such an agreement may actually serve as mistletoe on the franchisee, forcing him to buy at higher agreed-to contracted rates when the same product would be available at the local market much cheaper. For instance, experience with some Baskin Robbins franchisees show that while Baskin Robbins requires its franchisees to buy paper goods from the providers Baskin-Robbins recommends, the same product costs 30 to 40 percent less at Wal-Mart.

    The logic that franchisers negotiate on a national basis and order huge quantities to obtain a good supplier rate may hold true, but the benefits need not necessarily pass on to the franchisee. The supplier, may for instance charge an extra transportation markup, or require the franchisee to purchase an expensive point of sale system. In any case, co-op programs and professional and trade organizations offer the same buying efficiencies without the hassles of franchise agreements.

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    Reviewing the franchise, and the bad and good suggests that for each potential advantage the franchise business model provides, there lies a potential disadvantage. The suitability of the model, therefore, depends on the terms and industry conditions, on the specific offering by the franchisor, and the ability of the franchisee to gel with such offerings and thrive.