As the economic recovery continues at a slow pace, businesses conditions for small businesses are not improving. Our forecast of the number of new businesses to be created economy-wide in 2013 shows slightly weaker growth than estimated for 2012. We expect this pattern to hold for growth of the number of franchise establishments as well. However, the primary sources of the expected slowdown in GDP growth in 2013 (much weaker investment in nonresidential structures and a bigger decline in federal government spending) have a less direct impact on the franchise sector, and the franchise sector has outperformed the economy as a whole in 2012 based on most indicators. Thus, any fall-off in franchise sector growth in 2013 will be slight.
- We expect the number of franchise establishments in the United States to increase by 1.4 percent in 2013, just short of the 1.5 percent growth in 2012.
- We expect employment in franchise establishments to increase 2.0 percent in 2013, following again of 2.1 percent in 2012.
- Franchises have a higher success rate and lower failure rate than any business.
- Where the average is 50% cessation of activity in a traditional business in the first 5 years, it is only more than 20% on average for the franchise business.
- The survival of a franchise involves a tested operation, ongoing support, a recognized brand, and a dynamic group driven by the spirit of the network.
I) CHOOSING A FRANCHISE
Choosing the right franchise and avoiding the pitfalls
Opening and owning a franchise can be an exciting business venture, but does carry its risks. Early in your career or during a shift in your career, one may be tempted by entrepreneurship. Two avenues are available: create your own business or join a business created and lead by industry professionals who have created a set of services – a franchise network. Below is a list of points to consider and evaluate before choosing a franchise.
Analyze the business of the franchisor
Once you have defined the economic sector in which you want to go into, make a list of franchise businesses that exist in this area. Then look into the economic and financial status of each franchisor:
- How many years have they been in business?
- How many institutions does the franchisor own?
- What is the number of franchisees in the network?
- How many franchisees have left the network in recent years and why?
- Is it a local franchise or does the franchisor belong to a group (for example international group)?
- What are the financial results of the franchisor?
- What is the level of debt?
Once these points have been considered, you will be able to eliminate some franchise networks:
- Little or no cost, a sign of a bad positioning, poor management, and / or inadequate financial base for their development.
- Too much debt, which means the franchise does not have the means to finance their growth.
- “Too small,” which, while receiving franchise fees, usually will not have the support of a network. You find yourself in the same situation as the creator of a solo business, but with additional costs.
- Current implementation is highly concentrated on a region or area and whose expansion on your geographical area would be dangerous.
- Too new in the industry to compete with well-established players.
- Ones who“lose” franchisees regularly and especially when these departures are related to bankruptcy filings.
Analyze investment costs and set a budget
When signing for a franchise, you must consider the essential initial investments such as: - Purchase or lease of premises - Equipment needed to operate - Signs, furniture, etc.., The colors of the sign of the network - Entrance fee. Not only should you set a budget for the investments listed by the franchisor, but consider having extra cash flow for unexpected circumstances that may require an additional budget. Once you have analyzed each investment needed to start the business, you can consider financing the investment: capital and / or loan from a lending institution. One should avoid franchises that require too heavy an investment at the startup (unless you have a personal contribution), otherwise essential energy needed to serve the economic growth of the business is spent very early on anxiety due to repayment schedules that may be unrealistic if not careful.
Evaluate the expected profitability
Documents usually provide pre-contractual information to build an estimated operating cost. The construction of this budget is a crucial step and should let you know if the activity level is predictable enough to:
- Cover the costs of the business – to ensure payment of investments.
- Allow earnings, though never not without pitfalls.
- Validate the estimated revenues given by the franchisor.
- Secure the level of gross margin.
- Confirm the level of overhead-To secure the approach, you must complete the following steps. To start, analyze the income forecast proposed by the franchisor, taking two precautions: Make sure that the information provided by the franchisor are those of franchise “real” and not those of “farm”, belonging to the franchisor receiving preferential terms.
- Differentiate your analysis so that the accounts presented are those of an activity carried out in their own name (where the benefit includes the remuneration of the operator) or company (where profit excludes remuneration charged by the leader).
With these precautions taken, we advise you not to get involved in a franchise whose projected income statement shows a lack of profitability for several years, or whose income does not seem possible if the activity level is at the highest potential of the sector, or whose leader remuneration appears lower than that of an employee. A study of the balance sheets and income statements of established franchisees in similar geographic areas for several years, will determine if there is a structural lack of profitability or revenues are less than your projected break-even point, or the compensation is not one you want, then do not consider this business.
Analyze your contract
Franchise agreements are generally for a period of between three to five years. Renewal is usually by implied agreement unless notice by either party is sent by registered mail with return receipt six months before the end of the contract. Depending on the circumstances, the renewal can be done for the initial term of the contract or for periods of one year. In some franchises, the initial contract is not renewable. It can only be optionally followed by another contract. The analysis of the initial term of the contract and its terms of renewal will eliminate three types of franchises:
- Those whose initial contract period is insufficient or just sufficient enough to ensure the return on investment. Example: If you set your profit forecasts, you’ve come to the conclusion that the return on profitability under normal operating conditions is set for after thirty-six months. Avoid contracts over three years duration after which the franchisor may terminate the contract, so that your company may not yet have reported cash, or may even have cost you money. And this without taking into account the duration of the initial loan, often five to seven years!
- Those whose renewal is done by one-year periods. You do not have a perspective of time to develop your business. Every year, for six months, there is the chance that the franchisor may terminate the contract. The availability of time is a prerequisite for your economic success.
- Those whose contract is not renewed.
Study trade obligations
Franchise networks periodically organize very commercial actions that affect the entire network. Franchisees are generally required by the franchise agreement to participate, both financially and in organizing activities on their point of sale. Similarly, it is usually the franchisor that defines the brand, which makes the advertising plans and organizes participation. Franchisees also need to verify if the level of commercial actions suits him and if the cost is not prohibitive.
Pay attention to training requirements
Most franchise agreements provide for mandatory training for each franchise where training is provided by the franchisor. It is important to look at the content and the time of the initial training and the number of days of annual training. As trade obligations, you must check the adequacy of the content and cost of training, and weigh the training expenses in the income statement of the business of the franchisee. In some cases, the franchisor requires the use of complex software, which requires relatively heavy training. It is not uncommon to hear of franchises in which the duration of the training is over seven weeks for both employees and the franchisee! This is an initial investment of financial significance, and can be a serious burden to start.
II) THE ADVANTAGES OF A FRANCHISE
1) The franchise system is based on the concept of trust between the franchisee and the franchisor.
Nothing builds trust more than action. Therefore, a franchisor should make it clear that the long-term objective of the system is the financial and personal success of all participants. A good franchise system diligently fulfills its commitments, moral as well as legal. A good franchise system also proactively creates a culture in which franchisees and all franchise-system personnel feel free to bring concerns regarding the “health” of the franchisee network directly and/or privately to any member of the management team, including the CEO.
The franchisee will benefit from the brand. The brand of the franchisor is a sign of strong recognition among consumers but also among banks, which may offer some form of guarantee to the franchisor.
3) Save time
Starting up a business by yourself is not always easy. It may be easier to avoid spending time and money on research, development, marketing, etc. With a franchise, the initial work has already been done! You will have access to a proven method, operating procedures, training, and a marketing plan. Being a franchisee also ensures you will receive a follow-up by the franchisor during every step of the development of your franchise.
4) Learn a new business
One of the main benefits of owning a franchise is having the opportunity to learn a new business/trade.
5) Economies of scale
Starting a franchise requires less investment than the development branch (own units) as franchisees, in their capacity as entrepreneurs invest their own funds and are responsible for their company. On the other hand, the pooling of different processes (logistics, communication, recruitment …) allows franchisors to achieve economies of scale.
Marketing is taken care of by the franchisor which ensures easy delivery of advertising to franchisees.
7) Training and follow up
Ongoing training will be provided to the franchisee by the franchisor. This training can be done in the headquarters of the franchisor or the franchisee’s premises. Basic training should enable the franchisee to serve and advise clients competently and fulfill minimum quality standards specific to the franchise network. Training often deals with subjects as diverse as marketing, distribution, personnel, accounting, technology, computer software, product knowledge, sales techniques, rhetoric, time management, etc. Depending on the sector and the franchisee profile, basic training can last a few days or months.
Belonging to a network helps the franchisee avoid all the questions they would normally face when setting up a business.
III) HOW TO START
1) Have a good idea
This idea must be sufficiently developed and comprehensive enough that one can talk about the concept commercially. This is also referred to as a ‘recipe’: the business idea can come out of the assembly of new and particular ingredients already known. Conceptualizing the idea necessarily involves standardization, and therefore its formalization in writing, i.e., the development of a list of standards and charges that are described as “manual skills” or “bible “of the franchisor. The idea alone is not enough to build the system. It must be accompanied by a prior implementation and successful from one who claims to duplicate. It is in this experience that the inventor will acquire know-how in the transmission as well as the idea itself, and placed at the service of other operators who are franchisees.
2) Market Survey to Know your market
Running a study is essential before embarking on a franchise.
3) Your concept can be duplicated
To be “franchisable,” an idea must be attractive, viable, based on a specific expertise and especially duplicable. Otherwise, no need to go further. Starting a franchise business must be profitable for both the franchisor for its franchisees.
4) Business model
Building up a franchise costs about $300,000 on average.
Franchisors must surround themselves with qualified personnel. Each employee must have a specific job in the franchise. A team will be in charge of marketing, sales, operating, training, etc.