(Welcome, my friends to another edition of Investing…er, Small Business 101. Yes, in the interest of spreading my wings, broadening my horizons, and generally branching out, I’m going to switch gears a bit with my Investing 101 series and focus on different issues related to starting and running a small business. It’s a topic that has been tickling my fancy lately; after all, this blog could be considered as its own type of small business, so I do have a little experience in the field. So, join me as I attempt to explore other small business concepts and opportunities.)
Q: What is a franchise?
A: A franchise is a business structure where a person or (more often) a large corporation (such as, to use the most commonly encountered example, McDonald’s) allows others to use their products and trademarks.. The franchiser grants the rights to their intellectual property in exchange for the regular payment of a franchise fee and possibly royalties.
Q: Why bother with a franchise? Why can’t I open my own business and be done with it?
A: You certainly could open your own business; nobody would try to stop you. But there are some advantages of franchises, particularly from a customer’s point of view. Let’s say you’re driving in an area you’ve never been before, when you need to stop for lunch. There are two different restaurants available: Joe’s Burgers ‘N’ Fries and McDonald’s. Chances are, the McDonald’s will have roughly the same quality and selection of food as every other McDonald’s; Joe’s is a complete unknown, however. It might have the best food in the area, or it might give you food poisoning; there are few ways to know ahead of time. Given this unpredictability, most customers will opt for the known quality, even if it means settling for less than stellar service.
One of the most famous signs in all the world, and it could be yours
Q: So, name recognition is a big plus with a franchise; what are some others?
A: There are other advantages of franchises, for the franchisee and the franchiser. The franchisee gets a support network, help setting up and running their business, and can rely on a wide network of support and advertising to help boost their business. The franchiser gets financial compensation for their intellectual property, and the chance to expand their network of affiliated businesses without having to build them up personally.
Q: Seems pretty good all around. Are there any disadvantages of a franchise relationship?
A: As with anything, with the pros must come the cons. For the franchiser, this means losing some control over what happens to the businesses baring their company’s name. The more the franchisees are allowed to personalize or otherwise tailor the business model to their particular needs and desires, the less influence the franchiser will have over what happens to their brand name. In some cases, legal or other problems arising at one franchisee can taint the entire franchise, hurting the franchiser even if most of the franchisees followed all the rules and behaved in an outstanding manner.
There are problems for the franchisee, as well. The money paid to the franchiser cut into the bottom line of the company, meaning greater profits must be generated in order to get started with a franchise and simply stay afloat. As with the franchiser, there’s also the issue of control; being a franchise rather than an independent company means following certain rules and protocols set out by the franchiser to protect its brand. This means less ability to control and customize your own company according to your wishes. Finally, there are no guarantees; even a top flight franchise, with excellent support and promotion networks, can still fail for any number reasons, both in the franchisee’s control and outside of it.
Q: Alright, so if I’m still considering a franchise, where can I go to get more information?
A: If you have your heart set on a particular franchise, you can usually find information about being a franchisee through their website or other promotional materials. If you are still exploring the options, there are any number of sources online, such as Franchise.com and Entrepreneur.com, which specialize in franchises and can provide you with the information and help that you need to get started.
That’s about it for Franchise 101; hopefully, you’ve learned a bit more about franchises and how you can get started in the franchise game. Enjoy the franchise-owning goodness, if that’s where your interests lay.
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