How to Spot Franchising Opportunities
A franchise is the way to go if you are ready and willing to run and operate your own business but you can’t come up with an original and feasible idea of what the business should be.
Buying a franchise is one of the options that come up when people are in the process of brainstorming about setting up a business. However, many of them are very hesitant to pursue this channel because, even if their opening argument sounded good, the idea of a franchise is scary and a bit intimidating. It sounds like a complicated concept. Even the word itself – “franchise” – sounds complex.
Burger King. McDonalds. KFC. Subway. 7-11. Ace Hardware. Pizza Hut. These are some well-known names, and you can easily find these businesses anywhere. They also happen to be franchises. The million dollar question is: What do we really know about franchises, and how do we spot good franchising opportunities?
THE CONCEPT OF FRANCHISE
Since many refer to a franchise as an alternative to a business, it is easy to assume that they are different. However, a franchise is actually a type of business, and is operated and ran just like a business, with only a few noted distinctions.
Franchising features a scenario where a franchisee – often an individual or a smaller business – will purchase the license or the right to use the business system of an existing brand from a franchisor, which is often a larger business. This includes the right to use the franchisors brand, logo, products, and even marketing strategies and techniques. Even the advertising tools such as slogans, signage and posters made by the franchisor may be used by the franchisee. Despite that, the franchisee is still the owner of the franchise business, as signified by the franchise agreement entered into when he paid for the rights.
Essentially, large businesses make use of franchising for purposes of expansion. Through a licensing relationship giving rise to the franchise, the business is able to expand its reach, even to external markets, and promote its products, services, and brand.
In order to better understand what a franchise is, let us take a more in-depth look at its characteristics.
Characteristics of a Franchise
Ownership and control
In the straightforward definition of a business, we have an entity owned and operated by a business owner or founder and his managers or team of managers. Franchises are a bit unique.
In a franchise, there are two parties involved – the franchisee, or the party or individual who owns the business and operates it, and the franchisor, or the original owners of the larger business. This somehow implies that the business has two owners. Yes and no. Yes, in the sense that, although the business is owned and operated by the franchisee, it is still governed by certain terms provided by the franchisor.
A classic example is a multinational brand or company selling rights to a franchise. Once an individual or entity purchases these rights, the multinational company becomes a franchisor, and the purchaser the franchisee. The individual, as the owner of the rights, will operate the business, but will make use of the business name, logo and the overall business system of the franchisor.
Roles and responsibility
We mentioned that a franchise is a type of business. This means that it is in every right a business. The franchisor enters into a franchising agreement with the franchisee, which means that both are entering a contractual relationship.
The role of the franchisor is limited to being an overseer, seeing to it that his brand and methods of operation are being promoted and implemented by the franchisee in accordance with the agreement. He does not have a direct involvement or contact with the customers or the end-users. The franchisee is the one responsible with serving the customers or end-users, not the franchisor.
The franchisee, however, should keep in mind that he purchased the right to use the business processes and systems of the franchisor, and not the products and services themselves.
Business tools and operations
When they entered the franchise agreement, the franchisee automatically earns the right to make use of the business system and tools of the franchisor. In turn, the franchisor will have to provide the systems and tools required, and also provide support throughout the operation of the franchise. After all, if something goes wrong, it is their brand and company name that will suffer the biggest hit.
If you are determined to go into business, then why should you opt for a franchise instead of striking out on your own and starting from scratch? Or, if that very thought scares you, why don’t you consider buying an existing business instead?
To answer these questions, let’s take a brief look at the advantages of entering a franchise agreement with a franchisor and operating a franchise business instead.
- A franchise lets you operate a business with an established and well-known brand name. This means that you no longer have to work on building the brand and introducing it to the market; the market already knows about it. This also means that you are already entering a market that has a demand for the product or service that you will be selling. The franchisor has already laid the groundwork in terms of market study, so that takes a load off your shoulders.
- No more trial and error. Those who start a business have to spend the first few months (years, even) to set up a business system in place, test it, and train how to use it. It’s going to be mostly trial and error, because you will have to get rid of the processes that don’t work and focus on those that do. A franchise lets you make use of a proven business system and processes, so there is no need to test it. You will also be trained how to use the system the moment you enter into the franchise agreement, depending on the terms agreed upon.
- A franchise comes with ready marketing strategies. We already mentioned that the franchisor has conducted market studies, which means marketing strategies are already developed and mostly in place. If you are to implement these techniques, it will likely be at a minimum.
- You gain the advantage of economies of scale. You will be one among several other franchisees and, if we are talking about a large brand, you’re one in hundreds or thousands of franchisees. This means that you won’t be alone in negotiations for locations, lease terms and other applicable terms. Suppliers, distributors and other parties that you want to work with will look more favorably on you because you are part of a large account.
MOST SUCCESSFUL FRANCHISES SO FAR
To date, the following are five of the most successful franchises in the world:
- Jimmy John’s Sandwiches: Founded in 1983, this Illinois-based franchise sandwich restaurant chain specializes in sandwich delivery. To date, Jimmy John’s has more than 2,500 locations and counting, and 98% of the business operations are franchise-owned.
- Hampton by Hilton: Hampton by Hilton is a chain of mid-priced hotels, operating under the umbrella of hotel giant Hilton Worldwide. More than 2,000 Hampton by Hilton hotels are owned and operated by franchisees, making it one of the largest hotel franchises in the United States, and it has also branched out to 16 other countries outside the US in recent years.
- Supercuts: Hair salons are also getting the franchise treatment, and Supercuts is currently leading the pack. This hair salon franchise boasts more than 2,000 franchises all over the United States since it was opened for franchising in 1979. It has also expanded worldwide through franchises in the United Kingdom and Australia.
- Servpro: Servpro specializes in disaster restoration, cleanup, repairs and maintenance of properties that have been affected by water and fire damage.It serves both residential and commercial customers. It started in the US, but has also expanded to Canada, having a total of more than 1,700 franchises.
- Subway:Easily one of the most recognizable brands worldwide, Subway is a fast food restaurant franchise that sells submarine sandwiches and salads, among others. Currently, it has close to 45,000 restaurants all over the world, spanning 111 countries. It is also the largest restaurant operator in the world, and it seems that this won’t change any time soon.
SPOT FRANCHISING OPPORTUNITIES
Now that you’ve become more familiar with franchises, you might feel attracted to the idea of entering into a franchising agreement instead of starting your business from scratch. There is absolutely nothing wrong with that. However, you have to exercise a lot of caution. This is because there are so many franchising opportunities that may be presented to you, but not all of them are viable or profitable.
Just as there are many franchising opportunities that pan out and become successful, there are also many others that fail almost immediately after they are started. Therefore, there is a need for you to be more circumspect when looking for possibilities of a franchise.
How do you spot franchising opportunities? Here’s how.
Step 1. Determine what you want.
Almost all processes that involve making large investment decisions have to start within you – the businessman or entrepreneur. You already know that you want to go into business, and you have decided that a franchise is the right route for you. Do you just jump at the first franchise opportunity that presents itself?
Of course not. Here are some guiding questions you should answer first.
- What type of business or industry interests you? This is in keeping with the general concept that you should do something that you are actually interested in, or something that you love.
- What are the industries that have good or excellent growth potential? Naturally, you would want to steer clear of industries that have no hope of becoming more profitable in the future.
- How feasible is the type of business in your specific location or geographic area? Of course, even if a certain type of business has massive growth potential, if it won’t work in the area where you plan on setting up shop, you still won’t be able to fully realize that potential.
Step 2. Start the search, and search actively.
- Check out business lists. Business directories, chambers of commerce, and industry groups regularly come up with lists indicating very good franchise opportunities. Look for the updated lists so you can start somewhere and narrow your list down from there.
- Contact franchise companies directly. An advantage of directly communicating with these companies is so that you can immediately ask any and all questions you may have about the franchise. This is also one way to gauge how the franchise company does business. Normally, they would provide all the information that you need. If they tend to be difficult to get information from, or they dole out their information in trickles, you can treat this as a red flag that something is shady. Of course, you should also be prepared with all the questions that you need answers for before reaching out.
- Do your own preliminary research. Do not simply rely on promotional materials and brochures that are provided by franchise companies. Remember, these are basically collections of information from press releases by these companies, so they are expected to be biased. What you should do is look for third-party materials that talk about the franchise company. Go online to look up articles or publications about the company. You may also spend time at the library to do your research. Find old magazines and publications with articles about these companies.
- Seek advice from the experts. You can look for an experienced franchise attorney to help you out. Since they are already working in the field, they may have information on what franchise opportunities are currently attractive and worth investing in. They will also be good allies or advisors later on when you do decide on a franchise opportunity and need assistance in getting started.
Other experts you should try approaching include professional franchise advisers, accountants, local consultants, brokers, and other established and successful franchisees.
Step 3. Evaluate the opportunity.
This is where you will do more than just look at the surface. Normally, evaluation will be conducted through additional research, interviews with the franchisors and the existing franchisees, and going through the fundamentals and financials of the franchise company.
When evaluating the franchising opportunity, focus on the following:
Product or service
These is what will be delivered to the customers or end users. Is there a demand for the product or service? Is the product viable in your specific area or location? The franchisor has already proven a need for the product or service, but is that need and the demand in your geographic area as well?
It is important that you believe in the product or service that you will sell in your franchise business. Otherwise, you may end up not feeling passionate or involved in selling them.
This is where the target customers will be, and where your business will be set up. The franchisor will also have a huge say in the site selection. Will their selection coincide with your preference of location?
How much will you need to get the franchise business up and running? Take into consideration all the fees that you will pay when entering a franchise agreement, and if there are any other added costs that you are expected to incur outside of what was agreed upon. The franchisor will provide you the cost budgets, so that is a good starting point to evaluate your fiscal capability for this venture.
You may opt to personally run and manage the business, or you may appoint a team to work with you. Either way, you are going to need training that will supplement the knowledge that you already possess.
You may want to check the financials of the franchise company. What do the numbers say? What is the profitability enjoyed by the franchisor? By the other franchisees? Aside from existing historical earnings statements, you should also look into earnings projections, if available.
When perusing the income statements, whether historical or forecasts, do not just look at the bottom line or the net income. You should also try to analyze the other components, such as sales, sales per period, cost of sales, and the various expenditures and costs that will be incurred.
When evaluating franchising opportunities, you have to take a look at the amount of support that the franchisor will provide. What help can you expect from the franchisor?
Those who have a good eye for franchising opportunities often look for the following support services:
- Assistance when it comes to selection and development of business site. Will they aid you in looking for a good site to set up the business?
- Training for management and staff of the franchisee. Will the amount of training and the length of training period be enough for you and your team to learn the ropes of the business?
- Marketing and advertising. Will the franchisor provide support when it comes to marketing and advertising? If so, will they provide it only during the initial stages of operations, or will it continue indefinitely?
- Research and development. The franchisor may be continuously conducting R&D for new products and services. Will you also benefit from the results of these R&D efforts?
Step 4. Go over the Franchise Disclosure Document
This is the most important document in franchising since it contains most, if not all, the relevant and important information about the franchise company. It also gives you a better and clearer picture on what will be in store for you once you enter into a franchising agreement with the company.
Step 5. Look for these signs that a franchising opportunity is a scam
- The company refuses to give you the information or materials that you are asking for without signing a franchise agreement with you first.
- The company requires you to sign a disclaimer that says you won’t be holding the franchisor responsible for any claims or representations made by its representatives, and that are not written on the agreement.
- The company refuses to provide data or information on other franchisees, and even forbids you to communicate with them.
- The company makes it appear that the opportunity will disappear fast if you do not grab it today, RIGHT NOW. They are basically discouraging you from making further research into them, and just take their word for it.
- If it’s too good to be true, then it probably is. If the company makes claims about growth and profitability that seem to be incredible as to be impossible, then it may be just that: impossible. Some may even say that you need not do anything after signing the franchise agreement, and just wait for the money to flow in. That should warn you that it is not a legit business but a scam.