Starting a franchise business is very similar to starting a regular business in many ways. In fact, you could see it as an alternative option — and one that offers more opportunities, pride and excitement.
But if you’re considering buying into a franchise, you need to be prepared. Here’s everything you need to know about starting a franchise to make yours the success you dream of at night.
What is a franchise?
A franchise is a business model where the owners grant licences to other people, known as franchisees, to run a local branch of the organisation.
Franchisees pay a royalty fee to ‘rent’ the franchise brand and business model. The rest of the profit is theirs to keep.
For the franchisee, starting a franchise is an excellent way to manage a business themselves without going through the stress and risk of beginning a startup.
On the other hand, the arrangement allows the franchise owner to expand without worrying about micromanaging each location where they have a presence. You’ll find many franchise opportunities out there that suit your needs, experience and skills, with the most common types of franchises found in:
- food and beverage
- health and fitness
- hair salons
- automotive repair and services.
Opportunities and challenges of starting a franchise
A great advantage of starting a franchise is the fact that you don’t have to start from scratch; instead, you have the branding and advertising concepts ready to go so you can focus on the operational aspects of the business.
Your franchisor will also have existing vendors, eliminating the need for you to research suppliers and work out contacts with them.
You’ll also benefit from a proven business model behind you and projections based on experience, meaning your bank is more likely to look favourably on your loan application.
However, you don’t avoid the challenges that surround being a franchisee:
- Lack of independence. The franchiser will control many aspects of your business and receive a proportion of your sales income as royalty fees.
- Restrictions on business activity. You will have to honour the franchise agreement. So, if you have a profitable business idea that the franchise owners don’t like the sound of, you won’t be able to exploit it.
- Risks by association. Your franchise’s success is linked to the franchise name. If that is tarnished by another franchisee — because of an outbreak of food poisoning at their location, for instance — your business will take a hit, too.
- Added pressure. Buying into a franchise means running a business with a pre-established brand. That comes with a lot of pressure as standards will usually be extremely high.
Setting up a franchise
Now that you know what a franchise is and how one works, you’ll know whether purchasing one is right for you.If you have chosen to pursue this business model, here’s how to get started in some simple steps:
- Research franchises. You can find franchise opportunities on websites like Franchise Direct, which categorises franchises by industry, costs, etc. Pay close attention to the liquid capital required, royalty fees and other expenses.
- Evaluate opportunities and costs. Ensure the franchise you want to license doesn’t exist in your area. Plan your finances, too, so you know you can pay rent, maintenance, yearly royalty, travel, taxes and all other costs relevant to you.
- Draft a business plan. While many parts of the franchise will already be sorted for you, you still need to write a business plan to demonstrate why the franchisor should partner with you.
- Get the franchise licence agreement. Franchisors provide contracts that franchisees must adhere to. Make sure you understand everything in it and are comfortable with the restrictions and responsibilities it puts in place.
- Form a business entity. It’s now time to form an LLC or corporation and choose your business headquarters. Speak to your franchisor — they will probably have guidelines about everything you need.
Hire employees, train them and begin trading!
As you go forward
While it might not seem like it, becoming part of a franchise can involve just as much work as starting a business. However, working with a franchisor gives you the space to focus on the most critical aspects of your business. Nevertheless, your accounting and tax obligations will remain as a franchise; your finances must be just as neat and your business plan as comprehensive.