As we mentioned in the previous post on myths and realities of franchising franchising model helps those who want to get into small business; but do not have prior experience or do not want to start from scratch. These people like the fact that buying a franchise versus independent business will reduce the risk of failure. At the same time, they also question the value provided by franchisor for the amount of money they have to pay to them in terms of initial franchise fee as well as ongoing royalty.
As with any business transaction, it is important that you understand what you are getting in return for the money paid to the franchisor. While franchisor does provide benefits in exchange for the fees they receive; not all of them are equal. In addition, different franchises provide value in different areas depending on their strengths and strategy. You should know why you are buying one franchise over others and set proper expectations before making decision.
In our experience, franchises provide value in 4 categories listed below:
- Products / Services
- Brand / Marketing support
- Purchasing power
- Operational policies and procedures
Different franchises have strengths in different areas and provide different value to franchisees as a result. Below we explore each of these in detail to understand the benefits the franchises provide.
Products / Services – Many franchises offer unique products or services to their customers. Typically, they started by introducing these unique products or services as a standalone business; the customers loved them; they expanded to more locations as a result and eventually decided to franchise the concept. The franchisees can benefit by not having to take risk with an unproven concept. The franchisor has already tested it with customers and generated demand for it.
Brand / Marketing Support – Let’s face it. There is so much marketing “noise” out there coming from all angles that it is difficult to get attention of customers to your business. Besides, it costs a lot for independent business owner to market their business. This is where the franchise helps. They have already established the brand in the market; so you do not have to spend money and effort. Besides, it is less costly for them to do marketing because they typically cover large number of franchises and hence the cost is spread over larger base.
Purchasing Power – As you very well know the price per unit goes down as volume increases. By pooling purchasing for all franchisees the franchisor can get significant discount on all types of purchases ranging from raw materials to equipments to marketing brochures. Franchises like Subway can use the combined power of tens of thousands of stores to reduce their food cost by 3-4% producing $7,000 to $8,000 in annual savings for each store.
Operational Policies and Procedures – As any independent small business owner knows running a small business is a difficult and tiresome job. Particularly, when you are starting new there are just too many unknowns. You can always learn as you go; but that means making costly mistakes in the process. The franchisor can help by showing you how to do many of the daily tasks and streamlining your operations.
Of course knowing these benefits alone is not sufficient. You still have to do your homework to ensure that the particular franchise you are thinking of provides right fit for your expectations. We showed how to go about this in earlier posts here and here.
What do you think? How else have you benefited from owning a franchise as opposed to independent business?
