To Franchise or Not?

Setting up in business on your own can be a daunting task. Picking the right type of business can be equally challenging. So before you embark on your dream, choose the right business and, most of  all, do your research, says John McGee.

So you want to start your own business and take greater control over your life? Then congratulations, you are not alone. In fact with an estimated 275,000 would-be entrepreneurs on the island of Ireland, you are in very good company.

But do you go down the franchise route or do you attempt to start up your own business? And how do you go about choosing the right business and, if you have one, your family? Before you start to do anything, it is worthwhile setting aside some time to fully take stock of your strengths and weaknesses and relate them to any business idea you may have developed.

 Engage in some deep soul-searching about the kind of life you want for yourself and your family. Decide what you are prepared to put in financially, physically and emotionally in order to achieve it. Seek advice and support from them key family members and friends as they will more than likely be in a position to objectively point out your weaknesses (and you do have weaknesses!) and your strengths. They will also be the people who will suffer if the business goes pear-shaped down the line.

It should go without saying that picking the right business is vitally important. All too often people make some fundamental errors when they decide to strike out on their own. In some cases they have misjudged the market for their product or service by not doing their research properly. They may also discover that, much to their horror, they are totally unsuited to the particular business they have chosen or that it is completely different to what they thought it would be. It could be that they are not suited to dealing directly with the public, they find the hours are too long or the work too tedious or they simply don’t have the sales skills needed to bring in the business.

It is also a common misconception made by many aspiring business owners that once they have their business up and running, they have a job for life and that they can sit back, take it easy and watch the money roll in. How wrong they are. Quite simply, if you want your business to survive and thrive through the early days and beyond it is going to require a considerable physical and mental input from you from the outset. And even then there is no guarantee that your business will celebrate its first birthday.

Having assessed the various options and taken a good hard and honest look at all your strengths and weaknesses, the next step is to identify the business you would like to start and whether or not it is a franchise or run-of-the-mill business opportunity. The other alternative is, of course, a brand new start-up.

To the untrained eye, franchise and business opportunity investments look pretty much the same. With both you will have to dig into your pockets to fund them and both offer you the chance to capitalize on a business idea that has already proved to successful. Well that’s the theory anyway. Start-ups, on the other hand, are a different beast altogether. While they require an idea for a product or service, they can often require a lot more funding and by their very nature they can be very risky. If successful, however, start-ups can be the most rewarding in terms of the financial return.

If there’s one telltale difference between a franchise and a normal run-of-the-mill business opportunity, it’s the role of a trademark. One of the key hallmarks in any franchised business is the trademark and the right to use that trademark. Try opening a McDonald’s or a Burger King without their permission and the full wrath of their respective legal departments will descend upon you like a ton of you quarter pounders with cheese.

Long established and global franchises like McDonalds, Subway and KFC have invested millions of dollars in their brands and trademarks down through the years. Now these brands are instantly recognisable and carry a lot of clout in terms of consumer perception.

So every franchisee of a McDonald’s, Subway or KFC is paying for the privilege of using the trademark and when they enter into the franchise agreement they agree to protect the trademark and all that it stands for.

When considering the franchising route it is important never to underestimate the value of that trademark. In the vast majority of large franchise operations, these trademarks have become powerful consumer icons and indeed magnets on the global stage. In many cases these trademarks and brands promise and promote consistency wherever they are operating. So, the old story about a cheeseburger bought in a McDonald’s restaurant in Dublin or Cork being the exact same as one bought in a McDonald’s in Bejing is quite true.

Another key feature of a franchise is that a considerable emphasis is placed on training and ongoing assistance in the operation of the business. This is another key difference between the two. Typically it is the master franchisor who will provide this as part of the overall franchise package. The importance of this cannot be overestimated as the master franchisor has built up considerable market knowledge about the product and service on offer and a new franchisee can actually learn a lot about the business by following the practices and procedures that are in place. In the case of a business opportunity, the vendor generally takes his or her money, gives a minimum amount of instruction and heads off into the sunset.

Another major difference is the purchase cost and how it is structured. In the case of franchising, most franchisors require an up front franchise fee which can vary significantly from franchise to franchise. In addition many franchisors will also require an ongoing royalty fee on an annual basis. Again this can vary significantly from franchise to franchise but typically it can be between 5%-15% of annual sales. This covers a range of ongoing expenses like marketing and advertising and ongoing training. In the case of a business opportunity, only one up front fee- the full purchase price of a business plus working capital requirements – is needed.

Yet another difference between a franchise and a business opportunity is the legal agreement that franchisees must adhere to. This legal agreement is an important part of the overall franchise equation and it should not be taken lightly. While it is dealt with elsewhere in this publication, the legal agreement is there in the first place to protect both the franchisor and the franchisee and it sets out the parameters to which both parties will adhere to. If everyone sticks to them, the relationship should prove to be a mutually beneficial one.

So there are clear differences between a franchise opportunity and a normal business opportunity or start-up. Probably the most quoted of all the differences is that in franchising you are in business for yourself but not by yourself. If you can fully grasp this idea and all that comes with it, including working with and respecting the franichisor, then franchising could well be the ideal route for you.

First published in Franchise Options Magazine© to order back issues please call 01 6611660