Starting a business from scratch is often perceived as risky, and studies show that many startups collapse. This phenomenon has led to mushrooming of franchise businesses. Franchise businesses have become popular nowadays, thanks to the multiple benefits that come with it. Some of the benefits that accrue to a franchisee include a lower rate of failure, brand recognition, lower risk, and the assistance they get when running the business.
Although many franchise businesses do well generally, choosing the franchise business is important. It is usually an onerous task because different businesses have different risks and dynamics. For instance, the mechanics for running a restaurant franchise may significantly differ from that of running a financial institution franchise. A prospective entrepreneur may have everything like the right human resources and finances but flunk when choosing a franchise. When one flunks in choosing the right business, chances are the business will hit a dead end. Here are things to look out for when choosing a business sector.
Tips on Choosing the Right Business Sector for Franchise
It’s difficult to choose which department or section of business that you want to get involved in. Most people will choose something they are comfortable with, or passionate about. Thinks to take into account include:
- One’s Personal Goals - People want to venture into areas they believe in and are in tandem with their personal goals. For instance, an entrepreneur’s goal could be to buy a franchise that is in line with their passion or one that promises a certain amount of wealth or fortunes.
- Human Resources - An entrepreneur will need to marshal human capital in the running of the business. Some franchises may require them to have highly skilled labor while others may require average skills. One, therefore, needs to take into account the skills of the workers who will be expected to run the business.
- The Investment Budget - In most cases, one is required to pay an upfront fee and annual license fees. There will also be the cost of setting the whole business. A prospective franchisee should map out their budget to see whether the operating costs are sustainable.
- Online Reviews - An assessment whether the online reviews about the franchisors are consistently positive.
Signs of a Good Franchise
When you’re looking for a franchise, there’s a lot of things that you want to find. Some of these include:
- High growth prospects of the product - An entrepreneur could conduct research and establish that the underlying product is gaining traction. Such a franchise would be a great choice as opposed to one where the market is saturated.
- Support from Franchisor - If the franchisor offers unwavering support to the franchisee in terms of assistance and training, it is a sign of a good franchise. Such franchisors are cooperative and help in the speedy operationalization of the business.
- Great Management Team - Many franchises have a team that is managing the whole franchising process. It would be good if one meets with them to discuss the idea. From the talk, one can gauge whether they will be supportive or not. It would also help to assess their level of experience in managing the process. An experienced and knowledgeable management team can be a big plus in the success of the franchise business.
- Positive Feedback from other Franchisees - If other franchisees are upbeat about their franchise, then chances it is a good franchise. Conversely, an entrepreneur should keep away from a franchise with negative publicity.
Up Front and Long Term Franchise Costs
The franchise costs differ depending on the franchisor’s franchising policy, nature of business, or prevailing market conditions. It may be necessary to hire a consultant or find a knowledgable person with franchise pricing to negotiate competitive prices. A franchise will mostly involve payment of upfront fees, royalty fees and annual license fees.
In a broad sense, franchise fees refer to the money paid to the franchisor for operating a franchise business. However, many people use it to refer to initial fees. It is a one-off payment for using the franchisor’s brand name, products, trademarks, and business models. According to FTC rules, the fee is supposed to be above $500. Many range from $ 20,000 to $ 50,000. However, a master franchisee can be to the tune of $ 100,000 and above.
These are ongoing franchise fees collected from a franchisee monthly. The royalties are based on a percentage of revenue, but the rates differ depending on the type of business and other financial considerations.
There are also marketing and advertising fees pegged to monthly revenue. This is charged to cover for advertisements carried out by the franchisor.