Let’s weigh the main pros and cons of starting your own business by purchasing the right to use someone else’s brand.
Start from scratch or buy an existing business?
Many aspiring entrepreneurs have heard the word “franchise” but still don’t know what it is. A franchise is a special form of agreement when one party (the franchisor) grants the other party (the franchisee) the absolute right to act in the market on its own behalf. In this case, the latter is allowed to use the trademarks and/or brands of the franchisor. In other words, a franchise is a lease by an entrepreneur of a trademark for sale. own goods and services. Let's consider how profitable a franchise business is by identifying its pros and cons.
Pros of a franchise
One of the main advantages is the recognition of the trademark that was leased, and this may not necessarily be worldwide famous brand. There are many franchisors operating successfully within one country or one region.
Buying a franchise is a synonym high speed promotion own business. If you start a business from scratch, at first you will have to work on consumer trust. By purchasing a ready-made business, the company begins to make a profit almost immediately.
The franchisor’s extensive experience is invaluable for an entrepreneur, because he will not only represent a well-known brand on the market, but also receive all kinds of assistance in the form training courses, training aids, consultations. It will be easier to resolve the issue with advertising.
Having a franchise, the company officially works on behalf of the franchisor in the designated territory (its boundaries are specified in the contract). Therefore, it will not have to be afraid of competitors with a similar license.
Cons of a franchise
The high cost of the starter package is the most obvious disadvantage, especially when it comes to exclusive rights to a brand. However, exclusivity has a big advantage - the entrepreneur becomes the only legal representative of a popular brand in the region.
The next trouble is that the acquirer of the brand can be placed within a very narrow framework. And this is understandable, because the franchisor wants to develop, and for this he has to comply with certain market rules. But such restrictions can simply destroy an entrepreneur’s business.
Difficulties sometimes arise in legal relationships. Famous franchisors usually have a large staff of lawyers. They can draw up agreements in which the interests of the junior partner will be minimally respected. To thoroughly study the documents, a businessman needs to involve his lawyers.
A franchise can become a hindrance to creative development. For example, if an entrepreneur has new idea, capable of significantly developing a business and increasing profits, he will not always be able to realize it. Some franchisors prevent this, citing the fact that the franchise is already ready idea, which is already extremely debugged.
Finally, franchisors often insist on purchasing the necessary consumables and raw materials only from them or their partners, but not from competitors. It turns out that due to such restrictions, a businessman cannot influence part of his own costs.
It's no secret that purchasing ready-made business This is often a better deal than starting a business from scratch. Many experts identify two ways to buy an existing business. The first of them is the purchase of a ready-made business from the owner. The second way is franchising. In order for a novice entrepreneur to make the right choice, it is necessary to have a complete understanding of the advantages and disadvantages of both methods.
Purchasing a franchise is, at first glance, the most attractive way to buy a business, especially in a city like St. Petersburg. For example, let's take a ready-made business like a cafe. Purchasing it as a ready-made business is quite simple, since there is large number proposals. The most common franchise network catering- This is McDonald's. Buying a ready-made business through franchising is, first of all, buying a ready-made business model. But there is a risk of purchasing a scheme that is not always effective.
Another advantage of franchising is the ability to more easily attract investment funds. That is, having decided to purchase a ready-made franchise business in St. Petersburg, there is a high probability of receiving the necessary funds from banks and other investment funds, since they are provided with a proven and functioning business model, and not just forecasts and numbers on paper.
However, buying the same cafe as a franchise has a lot of pitfalls. First of all, the franchise is accompanied by a large financial threshold. That is, in order to enter the market, you must immediately pay a sum of money for the brand, brand and ready-made business model. In addition to the down payment, there is often also a monthly payment called a royalty.
The downside for many novice entrepreneurs who decide to buy a cafe on a franchising basis will be the limitation of their own initiative and creativity. It is this component of the work that is the main one for many businessmen, since when buying a ready-made business, everyone wants to realize themselves in it, and not follow instructions in everything.
A big disadvantage of working under a franchise is the established procurement system, which is controlled by the franchisor company. You may not select suppliers with more than favorable prices or better quality goods.
By simply buying a ready-made business, you can always adjust your actions in the process, discovering more profitable and the right ways development. Whereas, having chosen a franchise business, you do not have the opportunity to change the scheme of your work. And even if, in your opinion, the purchased business model has certain disadvantages, you will not be able to change course.
After analyzing the two methods of purchasing and developing an existing business, it is worth noting that they both have their pros and cons. However, when purchasing a ready-made non-franchise business, you will be responsible for all successes and failures yourself. That is, you will have full control over the process, and only your competent decision will influence the fate of the business, while the franchise strictly limits the entrepreneur.
Every entrepreneur who wants to open a business with an idea that has already proven itself in the market faces a choice: start on their own from scratch or. This choice is more difficult than it seems because the money invested in the business is at stake. Some say that a franchise is a waste of money. Others call her the best way get rich. We will tell you whether a franchise business is profitable and how to make the right decision.
Advantages of a franchise
The essence of franchising brings it to the fore: perfect cooperation between the seller and the buyer, when the first expands the business with almost no investment, and the second receives entrepreneurial experience, support and profit. Statistics are also on the side of the franchise, because most newcomers are forced to close in the first year. In franchising, this percentage is much lower. Let's figure out why it is profitable to work as a franchise:
- By purchasing a franchise, you automatically receive a well-promoted brand, recognizable and with a clean reputation.
- The franchisor invests in advertising himself. You can save on this item of income and time on building the company’s image, winning over customers - you can immediately move on to obtaining a stable profit.
- Support and training from the franchisor - you won’t get this if you start alone. The seller can take care of the franchisee, increasing his knowledge, skills and abilities through courses, master classes, training materials, and individual consultations.
- Consulting. When purchasing a franchise, the partner will help with solving specific issues: providing initial information about the market segment, advice on choosing premises and personnel, and marketing consultations.
- You know the amount you will need to run your business; everything has already been calculated for you. This way, you risk less by taking on too much money or stumbling with too little.
- Individual entrepreneurs are a dime a dozen, counterparties will not single out someone, which cannot be said about franchisors. They usually have established contacts with suppliers and have big discounts, so favorable conditions you will get it too.
- The franchisee shares responsibility with the franchisor. It is stress that can prevent a beginner from approaching the task calmly and confidently. He does not feel alone in difficult business situations and therefore the franchise becomes more competitive.
- Often the franchisor delineates the territory so as not to create competition between its own franchisees. The scope of the expansion is specified in the contract.
When purchasing a franchise, the partner will help with solving specific issues: providing initial information about the market segment, advice on choosing premises and personnel, and marketing consultations.
As a result, the picture is rosy: a franchise is easy money. You get the opportunity to develop, immediately rising to the same level as the parent company. But in no case should you draw conclusions without knowing about the shortcomings of the franchise.
Disadvantages of a franchise
Franchising is not a dominant system in business, which means it is far from ideal. The disadvantages are related to the fact that a franchisee with a business that seems to belong to him does not feel independent. And the return on investment of a franchise depends on many factors. You may face obstacles not only in growing your franchise, but also in growing yourself as an entrepreneur.
The most common problem for franchisees is... The start itself - the lump sum fee - costs a lot. Especially if you wanted privileges, so you won’t be able to fit into franchising from scratch. Add to this an ongoing royalty payment, which can be a constant amount or a tangible percentage of profits. This results in serious expenses, which are your responsibility to pay, even if you go broke.
Unfortunately, in Russia there is no legislation on franchising that would regulate its activities from start to finish, and the franchisee usually suffers from this. You should take care of yours at the stage of signing the contract by turning to a specialist for help. Do not forget about the strong legal support of the franchisor.
Another trouble that franchisees face is limited independence on all fronts. I have already developed a business development strategy and are working on it, so it will not be possible to leave this framework. It is important to the franchisor that you maintain the brand image. These standards may relate to the quality of service or the choice of premises and can be very high - such that the chance of failure becomes real. Even a sensible remark or an effective idea from an entrepreneur can be rejected only because a franchise is a well-oiled mechanism that does not tolerate deviations from the standard.
The disadvantages of a franchise are associated with risks that depend on the choice of the parent company. Franchising has become so popular that even yesterday's newcomers are selling it. Sometimes this works, but more often it leads to bankruptcy of both the franchisor and all its franchisees.
Even at this stage, your task is to study the company you are interested in, make sure that it really has successful experience, a recognizable brand and good reputation. Moreover, the collapse of the parent company with unconvincing competence for franchising will lead to the closure of everyone who worked with it.
And finally, another common problem: the franchisee may eventually find suppliers willing to work on favorable terms for him, but the franchisor has a requirement to purchase only from him or his suppliers. The rules of free competition do not work.
Drawing conclusions
Of course, the conclusion is different for everyone, and it depends on the specifics of the business, the expectations of the entrepreneur, and the conditions of the franchisor. It would be a good idea to study your future partner's numbers (if you have access to them) to find out the effectiveness of franchising. Remember that buying a franchise means investing. Therefore, follow the same rules. What profit will the money invested in the franchise bring? What will be the payback period of the franchise? Will I do a better job with this experience? Approach your decision with full responsibility, then you will get a truly profitable system that works for you.
Starting a business, as a rule, is associated with doubts about the direction of activity, as well as a number of questions about how to implement it. Many entrepreneurs prefer not to “invent the wheel” and opt for a well-promoted business idea that is in demand in a certain region. It would seem that this requires: buy the right to use the brand and collect laurels. However, everything is not so simple.
You can find out whether it is worth starting your business with a franchise, as well as what advantages and disadvantages it has, by reading the article.
What is a franchise
The franchise is:
- the object of the franchising agreement;
- a set of benefits that provide for the transfer of the right to use the brand from the franchisor (seller of the benefits) to the franchisee (buyer).
Features of the franchising agreement:
- the object of the contract can be both a trademark and technology;
- the clauses of the agreement provide for mutual obligations between the seller and the purchaser of goods, as well as conditions, in particular preferential ones, for the use of the franchise;
- use of the franchise is carried out on a paid basis;
- the contract establishes the period for using the benefits, as well as the region in which the franchisee has the right to operate;
- the legality of a franchise agreement is regulated by special regulations developed to protect intellectual property.
To understand how a franchise works, it is best to look at examples of its use that are well known to a wide range of users. Nowadays the Subway franchise is in demand and in demand among buyers, using the example of which we will consider the procedure practical implementation franchising agreement.
The cost of a franchise depends on the size of the initial or so-called lump-sum payment, the purpose of which is to pay for the direct use of the brand. The peculiarity of this registration fee is its non-refundable nature.
If we talk about the Subway brand, then before opening the first restaurant you will have to pay a fee of 12 thousand dollars, and this amount does not include VAT. To open a second restaurant, you will need less money, namely 9 thousand dollars, and the third, as well as each subsequent one, will require six thousand, again excluding tax. Opening a kiosk under this brand requires paying a fee, the amount of which is negotiated in each specific case separately, but, as a rule, does not exceed 50% of the amount that you would need to pay when opening a restaurant.
Based on the above, we can conclude that opening a franchise business, as well as in any other way, requires a significant investment of funds, therefore, if you decide to start a business, you can’t do without initial capital. In addition, purchasing a franchise cannot guarantee 100% success of your enterprise, since franchising relationships, along with advantages, also have a number of disadvantages.
A franchise, in essence, is just a good foundation for your business, further development which will depend only on you and the efforts you put in, therefore, before buying a franchise at a startup, you need to weigh all the pros and cons and objectively assess your capabilities, both financial and moral.
In addition, in addition to the non-refundable registration fee, there will be other expenses, the total amount of which will be from 100 to 200 thousand dollars, which also must be taken into account when planning a future franchise business.
Regarding income, then at first you shouldn’t really count on it, especially if you took part of the money to purchase a franchise or pay for related services on credit. However, if you direct your business in the right direction and make the necessary efforts, success will follow, because promoted trademark, whatever one may say, gives its owner a lot of advantages, the first of which is the lack of need for advertising and attracting customers. As a rule, a brand name is known to everyone and is popular.
Franchise benefits
Before listing the advantages of a franchise, it should be noted that they are much more numerous than the disadvantages, primarily because the franchisor guarantees full support for the business at all stages of its development.
The concept of support includes the provision by the franchisor of the following services:
- advising franchisees on all issues directly related to sales entrepreneurial activity;
- provision of materials necessary for the manufacture of products and finished goods;
- provision of related documents, legal support of the transaction, as well as other transactions of a legal nature, such as obtaining permits necessary for carrying out activities from the relevant authorities;
- all assistance in the successful sale of products and promotion of the franchise enterprise;
- training franchisee personnel, providing relevant instructions and recommendations regarding doing business;
- providing assistance in maintaining the enterprise.
The presented list of services that the franchisor usually undertakes to provide is not exhaustive and can be supplemented with secondary items, for example, providing the franchisee with special equipment or providing information about the technologies used by the franchisor.
Disadvantages of a franchise
Along with the advantages, a franchise business also has some disadvantages, such as:
- the need for a large investment of funds at the initial stage of business development (payment of a registration fee, as well as fairly large associated expenses);
- the presence of financial obligations to the franchisor, the fulfillment of which does not depend on how the business develops, that is, even in the event of failure, which is not excluded, one cannot count on release from the obligations established by the contract;
- the amount of profit received from a franchise business will be slightly less than from similar activities, but without a franchise. Remember that part of the income will become the property of the owner of the brand, the right to use which you purchased;
- constant dependence on the franchisor, in the event that the latter decides to cease operations and close its network, all you can count on is to conduct business until the end of the contract; after this period, the business will have to be closed. In addition, even if the franchisor does not plan to fold, all the difficulties it encounters will be reflected in the functioning of your enterprise, especially with regard to reputation issues.
To summarize, we can highlight three basic rules that a beginner must follow when opening a franchise business:
- objectively evaluate your financial and moral capabilities (paying the registration fee and monthly payments);
- give special attention When studying a franchise agreement, it is advisable to enlist the help of a legal specialist;
- choose a direction that you understand and that is interesting to you, otherwise failure cannot be avoided.
If you have any questions about opening a franchise business, our online lawyer on duty is ready to promptly advise you.
Statistics show that 85% of companies that open from scratch “burn out,” while only 14% of companies that bought a franchise cannot continue to operate successful business with benefit.
Of greatest interest today are franchises of the service sector and social cafes, shops and construction enterprises, training centers and public catering outlets. Therefore, before starting your search, you need to have at least an approximate idea of what exactly you prefer to do.
Features of buying a franchise
Inexperienced businessmen who buy franchises often do not notice the pitfalls in the terms of the contract. You risk purchasing an unprofitable “dummy” without finding out as much reliable information about the franchisor as possible. A franchisor who values his reputation is always ready to tell truthfully about his plans for the future, current successes, subsidiaries etc.Sometimes the conditions are daunting potential buyers. For example, in the agreement, franchisors may indicate the need to say certain words when serving customers, specific rules for cleaning premises, and other unusual points. However, you should not be afraid of them.
Important! If you buy a franchise, be prepared to have your business success under control. Your work will be regularly checked: if you fail to fulfill every condition of the contract, you will be subject to sanctions.
However, you should not be afraid. In recent years, about 9,000 companies have begun to operate profitably in this way. Franchisors help with more than just opening profitable business, but also with its subsequent management (purchase of equipment, hiring personnel, searching for suppliers, etc.).
You don’t have to spend money on promoting a brand/brand, since “your” name will already be well-known. You are given detailed plan which requires hard work. How profitable are franchise businesses? This can be judged by the fact that in just a year their number in our country has doubled.
Graph of the dynamics of franchising development in Russia and forecast for the future
Franchise cost
You will need to have initial capital. No one will give you a franchise for free. Prices are influenced by brand popularity. Offers from the most popular brands have a high price.Prices start from several thousand “American rubles” and go up. However, let’s say right away that the fee pays for itself: famous companies They provide maximum competent advice on business, ready-made websites on the Internet, and a list of suppliers offering discounts.
Advanced options include consulting support at every stage of work, recommendations for interior design, and training courses for managers and staff. The cost of such offers starts from 6 thousand dollars.
Luxury franchises are also of great interest. The package includes the supply of raw materials, visiting specialists (if necessary) and many other useful additional services.
The prices we have indicated now are conditional. Since companies with international names and popularity can sell franchises for 700 thousand dollars.
Franchisors are interested in selling franchises because... have their own percentage of income from this. Before concluding a transaction, be sure to read each clause of the agreement, and only after that sign and make an advance payment. Any franchise involves charging a certain amount financial resources to pay tax deductions.
Franchise - advantages of the solution
Entrepreneurs who purchase a franchise receive multifaceted assistance: recommendations, a list of trusted suppliers, and, ultimately, access to a business that has long been known. At the initial stage of doing business, businessmen save a lot on advertising - it is simply not needed. The franchise assumes that the entrepreneur who buys it will not have to “fantasize.” If you look into the details, a businessman turns from an entrepreneur into an excellent manager.
Their owners are responsible for the security of transactions. All transactions can usually be completed quickly and easily. There is, of course, an entry barrier. You must understand what you have to work with and be aware of at least the basics of management. You will also need an initial investment.
When starting a business from scratch, it is quite difficult to predict anything. You cannot know how much income your business will generate, when the purchased equipment will pay for itself, etc. In the case of a franchise, everything is much easier. You will be provided with maximum information - your only task is to work with it competently.
You don’t have to study the market and consumer demand. The data will be collected and transmitted to you by the franchise owner. Thanks to this, financial stability is achieved.
Disadvantages of starting a business with a franchise
- To open a business you need a lot of money. If you don't have a solid starting capital, you simply cannot buy a franchise;
- You will become addicted to the brand. You will not be able to make decisions on your own, for example, change the menu or product prices. The unprofitability of a brand directly affects those who represent it;
- The profit will belong not only to you, but also to the franchisor. To be fair, we note that the share of the latter is quite small. No one will deprive you of a significant part of your income;
- Danger of closing the case. If you are thriving, but the brand is decided to be liquidated, you will also be required to close your business.
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