In continuation of my previous post in buying a business as one way of entering the B-Business Quadrant, another way of entering a business is by buying a business franchise.
Say you don’t have the courage for a start-up or the breadth of experience to buy a business. Then maybe franchising is the ideal choice for you. Franchising is a readymade business system that offers a promising avenue into business ownership.
A reputable franchise gives you the advantage of a tried and true business operation, saving you the headaches and risk of developing your own. Moreover, because of the high success rate of franchises, banks are more willing to loan you money for a franchise than for a start-up.
Franchising is a method of business whereby a franchisor grants a franchisee the right to use a particular trademark or to market a particular product. In trademark or distributor franchising, the franchisee gains this right but does not receive a comprehensive business format.
Kiosaki shared some questions to ask yourself if you are really indeed ready for franchising:
The more yes answers, the better you are for franchising.
- Do you want your own business without starting from scratch?
- Are you extremely organized?
- Do you see problems through until they’re solved?
- Do you adapt easily to new ideas and changing circumstances at work?
- Do you enjoy working with people?
- Have you had at least five years of experience in some other leadership role?
- Would your family support you in a new business?
- Are you willing to risk your savings on a business venture?
- Can you live with the restrictions of a franchise agreement?
Coca-Cola is the most famous example of a trademark franchise. The soft drink is produced by independent bottling companies, each of which buys the right to the name, the secret recipe, and an exclusive distribution territory from the parent company or franchisor.
Here in the Philippines, one of the most successful business franchise is a Jollibee franchise. Jollibee has been so successful that it was able to overthrown the presence of multinational fastfood chain companies such as McDonalds and KFC to become the number 1 fastfood chain.
In business-format franchising, the franchisee gains not only the right to the trademark or product but also a business track record, thus eliminating the trial-and-error process that ruins many a small business owner. The classic example is McDonald’s. McDonald’s became the world’s most successful franchise by developing an assembly-line system for producing hamburgers that maximized production, minimized labor costs, and tripled profits.
A typical business-format franchise offers the franchisee:
- A licensed trademark
- A training program
- An operations manual
- Specifications, quality standards, and blueprints
- Ongoing assistance in systems such as advertising and purchasing
Evaluating yourself—and the franchise
Franchising takes a special type of person. The franchisee has to be both entrepreneurial and compliant—that is, willing to conduct business the franchisor’s way. Nothing is more tragic than courtroom fights that occur because the person who buys the system won’t do things the way the system’s creator wants them done.
If you find that you do have the right personality for franchising, next you’ll have to evaluate the franchise. Will the price of admission wipe you out—or open the way to a steady stream of future profits?
The Price of Success
In most business-format franchises, the franchisee pays an initial fee, ongoing royalties charged on gross sales or net revenues, and advertising fees. Royalties and ad fees can range from 0.5 percent to 15 percent of gross sales.
Before signing a franchise contract, make sure that the initial fee includes only money that can be justified as a cost component, such as recruiting or training. And find out whether the initial fee, royalties, and ad fees are comparable to those required by other franchises in the same industry. If you have any doubts about the fee structure, consult a lawyer or an accountant.
As an end to this post, I would like to leave again another Rich Dad Tip:
“When you buy a franchise, you’re buying a proven operating system.”
Source: Robert Kiyosaki’s Coaching Program