What Is Franchise Business?
What is a franchise business? That is the question many people ask when considering starting a franchise business of their own. Franchises allow aspiring entrepreneurs to enter into a business that already exists, so there are no start-up costs or long-term contracts. Some franchises are run by the parent company, while others are operated by a third party, such as a retailer. The first question most people ask is what is the cost of starting up a franchise?
The cost of starting a franchise varies greatly depending on the franchisor, the type of franchise, the market and the franchisor’s business plan. Generally, a franchise business is self-sustaining once it begins to see the benefits of the brand name, the service or products the franchisor provides. Once profitability is assured, then financing is usually sought to expand or start additional units. A typical total sales price is approximately one hundred thousand dollars, with additional fees for marketing and advertising. If the location is one already in operation, there may be additional financing required from a bank or other lending institution.
As with any business venture, there is risk to investing in what is known as an “outward looking” business. A well established franchisee has an advantage in this aspect because they know the market, service and product; however, what makes a successful franchisee also has a great deal to do with what is known as “inward looking” business system. A proven business system allows the franchisee to make wise choices and decisions in the future which will benefit the franchise. It also allows the franchise to make money even when the market or customer base changes. This “inward looking” business system requires long term commitments from the franchisee which are not always possible when you are buying what is called a “venturesome franchise”.
Most franchising opportunities are sold to new owners through what is called an “asset sale”. This means that the franchise business is simply purchased for cash. While most franchisors have their own method for selling assets, the reality is that they usually require the assistance of a third party to conduct the transaction. That party can either be a financial institution or a private individual. While many franchisors offer financial assistance to their franchisees, the asset sale process does not always work.
There are numerous factors that go into determining the results from an asset sale. The most common are the type of business being offered, location, competition and the amount of cash being offered to franchisees. Unfortunately, there are many franchise companies that sell a bad product, bad location or inefficient service. Many of these companies do not provide the level of service or support that is needed by their franchisees. As a result, many franchisees find that their success with the company ends sooner than later.
If you are a franchisee looking for what is called a “healthy” business, then you need to find a franchisor that offers a wide variety of services that meet your specific needs. You need to ask questions and make sure that your chosen company is aware of those needs. Many of the franchise companies that offer what is called “complete services” actually provide less than satisfactory services. The total sales may seem okay, but you need to make sure that the products and or services are of a very high quality. If a company is not careful, their name and their brand will be associated with low quality products or poor service.
Finding what is considered a “proven business” is slightly different than what is considered a franchise. A franchise business must meet all of the requirements set forth by the federal government in order to be considered legitimate. Proven business means that the franchisor has a good reputation for providing a quality product or service. If a franchise has been around for several years and has a good reputation, then that is a good indication that particular franchise is doing what it claims that it will.
Franchise associations are an excellent way to get information on what is franchise business. These associations gather together the opinions of thousands of franchisors. The information that they gather are always presented in easy to understand charts and graphs. This makes it very easy to track the progress of individual franchises over time. The most important thing to remember is that franchisors always need to improve their overall quality of service in order to remain a proven company.