By: Michael Evans on December 19th, 2013

Follow Your Dream, Part 2: Advantages of the Franchising Model

In my last article, I discussed the core concepts of the franchising model and the opportunities of micro-franchising.

Now that you understand franchising, I will go over the advatanges of the franchising model and some tips for successfully operating a franchise.

Advtanges of The Franchising Model

Besides avoiding the high cost of starting a business from scratch and the risk of having to test it, franchising can offer several advantages over starting your own business.

Product Recognition

A franchise business generally offers a product or service that many people are already aware of, often in a market that is fragmented, with few well established brands. Examples include dry cleaners, car washes and other firms that are typically “one off” businesses without name recognition.

Marketing Support

Franchises benefit from established and proven marketing programs and materials. The marketing and advertising campaigns created by the parent company and supported nationally through advertising helps increase sales for your franchise.

Single or Area Franchises

In many instances, particularly for new franchise operations, the franchisee may purchase rights to a single franchise or to an entire geographical territory. Consider walking before running and starting with a single franchise, and try to get the option or rights to develop more “stores” in your geographical area.

Back-office and Administrative Support

Most franchise companies offer systems support such as information technology services and support, billing processes, accounting systems and call center and customer support at a much lower cost than if you were to create your own business from scratch.

Supplies

Key national contract terms are available through most franchise organizations at terms that you could not negotiate without the buying power of a much larger organization.

Financing Your Franchise

Obtaining financing for franchised business ventures is often challenging for entrepreneurs. From the startup phase to growing the business, entrepreneurs face difficulties meeting the requirements of traditional bank loans. The SBA 7(a) Program is the SBA’s primary and most popular program. If you can demonstrate a need for funds and a sound business purpose, you may be eligible for the SBA 7(a) Loan Program. But you must meet SBA’s standards for being considered “small” within your particular industry. You must have reasonable equity in the business to qualify for an SBA loan.

Successfully Operating a Franchise

There are several guidelines to creating a successful franchise. Failing to meet them is the downfall of many franchisees.

1. Build scale by adopting the defined business model. The franchise model reinforces a meticulously defined business system. Franchise companies drive marketing and product development centrally. As a local franchisee, you must be disciplined in adopting the franchisor’s established strategy in your local market. Deviating from it because you think you have a better idea for running the business is a recipe for failure.

2. Get employee buy in. Define and enforce the system to your employees as rigorously as the franchisor defines it to you.

3. Be prepared to sustain your marketing and advertising efforts. In tougher market conditions, non-franchise companies often reduce marketing and advertising to maintain quarterly bottom line performance. Franchise contracts require spending either a flat dollar amount of marketing/advertising or at least a fixed percentage of revenues.

When the franchising model is executed well, it yields a high degree of alignment and shared commitment between franchisor and franchisees. Franchisees have “skin in the game” because they have invested their money and sweat and own a share of the upside.

If you think you have entrepreneurial drive and a resilient spirit and would like to start your own business, traditional or microfranchising is a route to consider.

About the Author

As a partner with Ernst & Young, Mike developed, led and drove significant growth in a number of practices. Mike’s experience also includes work with middle market entrepreneurs in which he advised many small-medium clients in Silicon Valley on tax strategy and planning. Contact or learn more about Michael here.