It has been said that franchising allows the small business person to find a cheap and secure way to success without much management experience. Is this true?
It has been said that franchising allows the small business person to find a cheap and secure way to success without much management experience. Is this true?
INTRODUCTION:
It is undoubtedly true to say that deciding whether or not to go into business is a very important step in the business start-up process for new and potential small business owners. Due to the risk and the amount of work involved in starting a new business, many new and potential small business owners choose franchising as an alternative to starting a new, independent business. However, it is important to realise that the success of any small business, including a franchise, need to include factors such as the right guidance, support business networks and the correct infrastructure for the given area in which the new franchisee is operating.
This report will commence with an explanation of what franchising is, how successful it appears to be, and finally will give the advantages and disadvantages in order to verify whether franchising is an easy way to success.
FRANCHISING
Franchising is both an old and new concept that became recognised in the 1800s. The term from the French originally meant to be free from servitude. Its meaning in the context of present-day, is the opportunity for an individual to own his or her own business, even if he or she is in experienced or lacks adequate capital.
By definition, a franchise is a form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee.1.
To simplify, franchising is a method of distributing products or services. There are at least two levels of people involved franchising, the franchisor and the franchisee. The franchisor lends the trademark, trade name, logo, or advertising along with marketing plans, management guidance, site location and training to the franchisee. The franchisee, who pays a royalty (a sum of money) based on a percentage of the his or her sales, and often an initial fee is required for the right to do business under the franchisor's name, is expected to bring the franchise operation the entrepreneurial spirit and drive necessary to make the franchise a success. It is therefore clear that the success of the franchise will not solely depend on the 'tried-and-test' product and service2, but instead will depend on the franchisees efforts. The franchisee needs to consider much about planning, strategy and other market factors that can sometimes dictate the success of a given franchisee despite the overall success of the franchise business.
Various franchising companies believe that franchising is a network of interdependent business relationships that allows people to share brand identification, a successful method of doing business, and a strong marketing and distribution system. Even though it must be notified that franchising is not a guaranteed formula for success, it is often economically beneficial to capitalise on another person's business plan and not have to spend the time and money doing it yourself. However it must be considered that to reach a successful franchising system, time dedication is essential to establish the product or service, the marketing tools are needed, pricing and staffing strategies are also important. If all these factors are established, the franchise system is likely to be secure, and less risky.
REASONS FOR CHOOSING FRANCHISING
While forms of franchising have been in use since the Civil War, enormous growth has occurred in franchising within the 20th and 21st century. By the end of 1985, 500,000 establishments in 50 industries achieved gross sales of over half a trillion dollars and employed 5.6 million full and part-time employees. Franchising created 18,500 new businesses in 1991 and approximately 108,000 new jobs to the American economy alone. Business format franchises experienced sales growth of 8.9% from $213.2 billion in 1990 to 232.2 billion in 19913.
Franchising continued to expand in ...
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REASONS FOR CHOOSING FRANCHISING
While forms of franchising have been in use since the Civil War, enormous growth has occurred in franchising within the 20th and 21st century. By the end of 1985, 500,000 establishments in 50 industries achieved gross sales of over half a trillion dollars and employed 5.6 million full and part-time employees. Franchising created 18,500 new businesses in 1991 and approximately 108,000 new jobs to the American economy alone. Business format franchises experienced sales growth of 8.9% from $213.2 billion in 1990 to 232.2 billion in 19913.
Franchising continued to expand in the United States, and around the world, to Europe, Asia, Australia and Africa. Russia and Egypt for example had both huge success rates when the first McDonalds franchise opened in the 90's. This later encouraged more franchising companies to open, including Subway Restaurants and Body Shop boutiques. This indicates that franchising is a business culture to achieve rapid global expansion and there are no signs of it slowing down. However, it must be considered that if a franchise was to open in Egypt, up-to-date information needs to be gathered, including market analysis and local laws.
According to a millennium franchising survey by National Westminster Bank and the British Franchise Association (BFA), franchises, within the UK increased their turnover by 17% from the previous year, in the year 2000 to £8.9bn.
Last year, the Financial Times reported an increasing diversification away from traditional retail and catering to personal services such as cleaning and business-to-business systems, up 18% and 14% respectively the previous year.
The diversification is also geographical, with franchises more evenly spread across the UK than five years ago, when franchising had a distinct southern bias.
According to recent surveys in 20014, it has been found that 95% of all UK franchisees report profitability, the highest figure ever recorded, indicating a mere 5% of failing to make profits. Such figures show that buying a franchise can give a person a measure of security, risk reduction along with profits. Furthermore, various business surveys reveal that fewer than 10 to 20% of all new franchised businesses fail, meaning an impressive success rate of 80 to 90 percent. This is in comparison to a 60 to 80 % failure rate for all new other businesses.
With comfort in entering the franchising business, a franchisee feels a sense of total freedom associated with being an 'independent owner' to become part of a group of people committed to building a brand and dominating markets using a common, tested operating system. The franchise system is not only beneficial for the new franchisee, but also for the franchise system as it provides group buying power to cut operating expenses, faster growth due to tested marketing programs, predictable results based on your adherence to the operating system and less risk of the franchisees invested capital.
Industries that rely on franchised businesses to distribute their products and services touch every aspect of life today, from retail sales and real estate to fast foods and domestic cleaning. Thus, we can see that franchising can be a viable, lucrative business alternative with many advantages.
COMPANIES OF FRANCHISING
McDonald's
McDonald's is a global successful franchising food-service retailer with more than 30,000 restaurants in 121 countries. It's first franchised restaurant opened during the mid 50's in America. Today, McDonald's remains committed to its franchisees, as they are a major reason for the company's success. When considering entering this successful company, the initial cash investment is a minimum of merely $175,0005. Many believe the success of McDonalds is the committed management that drives the franchisees to be motivated, well alert of their market and therefore make profits for the company.
WSI Internet Company
WSI Internet has only been going for the past 8 years and has managed to establish more than 700 franchises in 87 countries6. In the year 2001, it was the number one fastest growing business service franchise, and fourth fastest growing franchise in the world7, leading it to be one of the most profitable franchise opportunities in the world today. With such impressive success rates in franchising, this is a perfect opportunity to join while still ensuring a fairly low cost investment and secure. WSI Internet basically help small and medium sized companies within a community to profit from the internet. They insist that not much experience is required as it offers its franchisees a complete and comprehensive training and certification programs, along with a dynamic on going support program. The capital required is approximately $40,000.
Cleaning Doctor
Cleaning Doctor was first established in the mid 80's in the UK and Ireland. Today it offers franchise opportunities, giving comprehensive support in a home-based, low-cost, high-profit. Cleaning Doctor is basically a cleaning service for carpets upholstery. Each franchisee is afforded the opportunity to replicate a proven Cleaning Doctor franchise option in his or her exclusive territory. The success of this company is inevitable and asks for an investment fee of around £50008. This is clearly the cheapest of the franchise examples and seems to be a good way to start a successful franchise.
The examples above clearly indicate that as each company envisioned goal strategies and objectives for their franchising system to succeed, more people are likely to become part of their company as a franchisee. With low costs, low risks, high management training and support, a small business person is more likely to choose a well establish franchising company as an easier route to success.
ADVANTAGES AND DISADVANTAGES OF FRANCHISING
Advantages of Franchising
* It is known that capital is always scarce in growing any business. In franchising the capital needed to expand the business is provided by the Franchisee. Therefore it is a case of using other people's money to help the company expand locally and internationally. In this case, it is the franchisees that provide the capital with their investment stake in the business9
* Trained, motivated, and potential profit-making managers are all part of franchising as the franchisees invest their money in a franchise, aiming to gain profits.
* Today, the pace of the marketplace changes very quickly, meaning that if people don't continuously improve their business and expand, then someone else will. The way to rapid expansion is mainly through franchising where maximum profits are foreseen as the business expands worldwide.
* As franchising system grows and become successful, landlords become attracted to the well-established franchises and prefer them in their shopping centres for example. It is therefore easier to secure great locations as a franchisor than it would be for a non-franchise business.
* A franchise can do extensive advertising in a given market because the costs are spread among many units. This combination of having many high profile locations with large advertising budgets is clearly a competitive advantage.
* Therefore what makes franchising such a popular way for a small business person to go into the business is the fact that 94% of franchisees reported their own franchise operation to be successful10. A new franchise opens every 8 minutes of each business day.
* Among the services the franchisors many provide the franchisee support in location analysis, store development aid, initial employee and management training and continuing management counselling; and advertising and merchandising assistance.
Disadvantages of Franchising
* A franchisee does not realise that they will be tired to the business. They are expected to work long and hard hours and provide continuous hard effort in maximising sales revenues. It is therefore important to choose something that you enjoy and can stay passionate about.
* However the franchisee is not 'his-own boss', because in order to maintain the distinctiveness of the franchising service and protect and build its goodwill, the franchisor usually exercises some degree of continuing control over the operations of its franchisees and requires them to meet high standards of quality.
* Sometimes, an owner of a franchised business must give up some options and freedom of action in business decisions that would otherwise be open to the owner of a non-franchised business.
* Many variables can affect the franchise sales effort such as interest rates, bank willingness to make loans for the franchise, the condition of the national economy, and competition.
* To succeed, you have to have the franchise fee income to stay in business until you have enough franchise royalty income to reach a monthly break-even.
* The biggest negative factor in franchising is the conflicts between the franchisee and franchisor that is almost inevitable and worse still the litigations. As long as the franchisees are making money, everything is fine, but if they lose money, then conflict will arise and if the franchisor does not handle the situation well he or she could end up in court being accused of everything from not providing adequate training to misrepresentation and fraud. The way to avoid conflict and litigation is to do everything possible to support the franchises and make them successful.
THE SUCCESS OF FRANCHISING
The success of franchising can be achieved simply by choosing an established franchising company that gives you the right to use a 'well-tried business formula for a start-up fee, which can be as low as a few thousand pounds'11. Where there is sufficient market research, correct site location, high training provided to franchisees, high company management, competitive prices12 and finally an adequate and well-funded franchisor to recruit a suitable franchisee, the franchising company is expected to succeed.
However, despite the help, support and guidance from the franchisor, in order for the franchisee to maintain any degree of success they will in addition to following close to the vision, goals and objectives of the franchise, be able to:
* Recruit and maintain good staff
* Maintain customer loyalty
* Maintain a good profit and market share in the competitive market of today.
* Recognise any instability in their market
It is undoubtedly true to say that some new franchisees do better than others who are also operating under the same franchise since their ability to judge the market is higher. Their ability to know what their customers require and how to challenge the competitors is also an advantage to a successful franchise.
FUTURE OF FRANCHISING
The growth of franchising is inevitable as it clearly offers aspiring, new business owners the best possible chance of succeeding with the least risk. Within a decade or less, franchising will comprise over 50% of the retail economy, and will employ millions of people around the world13. As the U.S. and world economies grow with the ever increasing populations, and the move toward free market economies, new franchise concepts will come on the scene and the well-managed existing franchise companies will continue to grow.
There is a move toward better protection of franchisee rights and over time this will push more franchisors towards structuring their relationships with their franchisees in a totally positive manner. Franchising is evolving, it's getting better conceptually and in reality. There are greater opportunities for wealth creation among both franchisees and franchisors today then ever before.
The future of franchising is bright, and if a person wanted to take a step into business for him self, then franchising is the path to take in the 21st century.
CONCLUSION
It can therefore be concluded that franchising is a convenient and economic means for the filling of a drive or desire (for independence) with minimum risk and investment and maximum opportunities for success through the utilization of a proven product or service and marketing method.
Statistics indicate that franchises grow more quickly, reach break-even sooner and succeed more often than independent companies in the same industry. Therefore, you are lowering your risk factor when you buy a franchise14. Thus, franchising will allow the small business person to find a cheap and secure way to success without much management experience just as long as it is clear to them that it is not an easy path. This might not need much money and experience as all training is given and it secure and less risky, leading to inevitable success just as long as the hard effort, commitment, strategic planning and motivation is incorporated.
BIBLIOGRAPHY
* Unravelling the Evidence on Franchising System Survivability, Stanworth, 1999
* The Structure of Business, M Buckley, 1994
* The Barclays Guide to Franchising for small business, B Smith, 1991
* British Franchise Association, 2001
* American Franchise Association
* Entrepreneur magazine, 2001
* Streetwise Franchising, B Danielle, 1990
* International Franchising Association
* Franchise Organisation, L. Bradach, 1998
* Franchising, I Maitland, 2000
INTERNET SITES
* www.investowords.com
* www.franchisedoc.com
* www.mcdonalds.com
* www.wsicorporate.com
* www.cleaningdoctor.net
Investorwords.com (11/03/2001)
2 Unravelling the evidence on franchise system, John Stanworth, 1999.
3 Statistics from Franchisedoc.com (11/03/02)
4 British Franchise Association, 2001
5 mcdonalds.com/corporate/franchise (11/03/02)
6 wsicorporate.com (12/03/02)
7 entrepreneur magazine, 2001
8 Cleaningdoctor.net (12/03/02)
9 The Barclays Guide to Franchising for the Small Business, B. Smith, 1991
0 Gallop survey - American franchise association (12/03/02)
1 Unravelling the evidence on the franchising system survivability, Stanworth, 1999
2 Streetwise franchising, B. Danielle, 1990
3 International Franchise Association, 2001
4 The structure of business, M. Bukley, 1994
