Franchise business: making money on a brand
Starting a business is not for everyone. First you need to come up with a cool idea and bring it to life. Check if people liked the idea. Go through all the pitfalls in business development. Verify its effectiveness over time. Agree, start-up capital can burn out at any stage. A franchise business will insure you against these problems.
It is recommended to those who are just starting their own business. In fact, working on a ready-made business model will save you from the mistakes of beginners. In this article, we talk about how the franchising system works.
Understanding the terms
In essence, you are renting a brand. Unlike buying a ready-made business, which we talked about here, there is less risk of failure. Firstly, those who are already working with the franchise are its live advertising. And the best proof of effectiveness. Secondly, under such conditions it is difficult to give away a pig in a poke. Everything is very transparent.
A franchise is a system that regulates the rights to use the franchisor’s business model and brand.
In terms, everything is extremely simple and clear. For example, you want to open a store of a popular brand in your city. To do this, you need to buy a franchise from a franchisor – a person who leases the brand. You conclude an agreement with him and pay the agreed amount of money – a lump sum. This is directly buying a franchise. Together with the name, the buyer receives a working business model and an accurate description of the brand. Now he becomes a franchisee – a tenant of the brand. In addition to the lump-sum payment (it is paid at the first stage), the tenant regularly transfers royalties . Royalty is a payment that is required to be paid every month. Most often, this is a small percentage of sales.
Franchise business is divided into several types. So, commodity franchising gives the right to sell the goods of the franchisor. A good example would be a new Zara or H&M store that opened in your city. Industrial franchising offers to buy technology for the production of a product. Service – allows you to provide services under your brand and according to your standards. This is how a large network of car washes or beauty salons will work. There is also a business format of cooperation. In this case, the franchise transfers the right to conduct business according to the concept of the franchisor. This is what McDonald’s fast food chain does.
Franchising: we delve into the subtleties
Franchise agreements are very different from each other. Depending on the brand, you may be offered simple or complex conditions. Thus, large companies with a worldwide reputation dictate clear requirements. Take, for example, the Burger King restaurant chain. They take into account all the nuances. Their franchise business is written down to the smallest detail. The list includes a single uniform for employees, recipes, room design. Even the ingredients for dishes and the frequency of cleaning. All this ensures recognition and a single brand standard. So, it works for the benefit of the franchisee.
Consider the story of Ray Kroc, who turned the McDonald brothers’ restaurant into a global brand. He achieved this mass effect through the sale of a franchise. To attract as many buyers as possible, he set a small lump-sum fee. Consequently, reduced the first costs and increased the influx of franchisees. Then he prescribed strict requirements for the brand. Form, etiquette, prices, menus – everything was done according to the regulations. The little things that together gave the image of the McDonald’s brand were strictly observed. So Ray Kroc ensured continuous growth in profits. As a result, the businessman received the main income from royalties. After all, the more his clients earned, the more Krok himself left.
Therefore, a good franchisor strictly monitors the implementation of its instructions. Unfortunately, this means that you will not translate your ideas into the finished case. Also, someone else’s franchise business may oblige you to buy the franchisor’s products. This clause often appears in contracts. And the prices of raw materials can easily overestimate. If it’s part of the deal, you still have to take only those.
An advertising fee brings additional costs. Every time a company runs a promotion, all franchisees transfer money to it. On the other hand, it is even beneficial. After all, you have high-quality and expensive advertising with a minimum of costs.
franchise business: pros and cons
Perhaps the main difficulty for a beginner is the availability of basic capital. A franchise business involves a large financial investment at the start. It is impossible to make money on it from scratch. It’s not just about the cost of buying a franchise. The franchisee is obliged to pay all the costs of opening a new point. And do not forget about the main money trick. The more famous the brand, the more expensive the cost of its franchise. But before you are many examples of their success. But cheaper and not promoted brands – a pig in a poke. Experts advise against buying a franchise that has been on the market for less than three years. She can "shoot" and exceed all expectations. But it can also wither, not taking root in the new soil.
Another disadvantage of such a business is that you will never catch up with the franchisor. You can go up on a franchise up to a certain capital. So your growth is limited from the start. So why are people actively buying franchises? It’s all about safety.
In the restless sea of business, the tenant does not go out alone. The franchisor is his guarantee and support. It is beneficial to him that your business goes uphill. See the point with Ray Kroc, who made his fortune on the success of the franchisee. In addition, you do not need to trial and error to find an effective way to do business. The franchisor has already found it before you. And for a lump sum, he will tell his working strategy. If a company sells franchises, then it is in demand. Once you enter the market, customers will appear. They are already familiar with the brand. It turns out that you can save on your own advertising.
Finally, we invite you to watch the video. The guys from Just Apple talk in detail about their product for potential franchisees. Here is the minimum set of data that you need to know about the company before thinking about buying a franchise.