Monday, November 8, 2010

Why Consider Buying a Franchise?

Franchising allows for rapid market expansion and provides its franchisees with an already proven business model.

A franchise system allows for the sharing of power between a central governing body called a franchisor, and any number of small businesses, called franchisees, that are governed by this body. This is a symbiotic relationship in which everyone benefits, and both the franchisor and franchisee depend upon one another for survival. McDonald's is a classic franchise system. The McDonald's corporation, the franchisor, does all of the high level work, advertising, organization, quality control, and research and development. But all of the day to day activities of actually cooking up burgers and serving customers are taken care of by independently owned small businesses, called franchisees. By separating the labor in this way, the maximum financial benefit is ensured for everyone involved. What could be better?

But just in case you aren't yet convinced, let's go into some specifics. First of all, let's go into some of the reasons why a company would want to franchise its concept in the first place:

Benefits for Franchisors

The Spreading of Capital Costs
By franchising a business concept, the franchisor is able to spread out the capital investment beyond itself, taking off a lot of the pressure for investment. Small businesses owners will invest in a branch of the franchise and share a small amount of the profits with the franchisor. This way the business can expand without investing too much of its own capital. This allows it to expend the bulk of its energy on marketing and on thinking of new and better products and services.

Rapid Market Expansion
The above-mentioned decentralized capitalization process allows the franchise to expand rapidly. The franchisor only makes a small profit off of each new franchise unit, but the rapid expansion of these units makes the profits add up quickly. Since each franchise unit is essentially the same, it is easy for new franchisees to start new units. The franchise unit is a job in the box. If you have the key, you can open it and turn it into a successful business. This allows the franchise to spread out organically to any place that has a market for its products.

Expanding Brand
With each new franchise unit, the the franchisor also receives additional brand exposure, which is basically free advertising. The more units that open, the more brand recognition, and the easier it is to open even more units. This creates a domino effect that allows well run franchises with quality products to quickly saturate the market with their trademark.

Quality Control
Franchise systems give the franchisor the right to maintain quality control standards. This ensures that the product or service is the same in every franchise unit, no matter where in the world it operates. This benefits the franchisor by ensuring its reputation, and benefits the franchisee by making sure that the unit follows a proven pattern for profitability and success. The fact that you can go anywhere in the United States and find that the Big Mac always tastes the same, is due to this very phenomenon.

Economies of Scale
The overarching expansion of the franchise brand allows for a greater profit margin in exponential proportion to this expansion. The more franchise units open, the money the franchisor has to expend per unit, and the greater the overall return on each dollar invested.

“Okay,” you're thinking. “This is all really great for the franchisor, but what about me, what do I get out of all of this if I buy a franchise?” Well actually, the benefits to the franchisee are at least as great as, and probably greater than, those to the franchisor. Here is a list that only begins to scratch the surface:

Immediate Individual Business Ownership
A franchise unit allows you to own a business with a proven model without having to reinvent the wheel or fine tune a business model over a period of months or even years. The franchise unit comes with everything that you need to start and run a successful business right away.

Risk Management
Being part of a franchise allows you to use collective bargaining along with other franchise units for great rates on insurance. At the same time, your status as a franchise unit reduces the riskiness of yoru venture. When an insurance company looks at a new small business, they understand that the franchise unit with a proven national brand behind it is a much safer investment than an independent venture. Thus, insurers will be confident enough to give you a lower rate.

Lower Barriers to Entry and a Shorter Learning Curve
You don't have to take the time to learn through trial and error or to establish a new brand name, since you will be operating under an already successful model. All that you have to do is follow the guidelines and brand recognition will take care of the rest.

Business Exit Strategies
Franchise units always come with business exit strategies which make it easier to pass the business along to a family member or partner when you decide that it is time. Also, the one size fits all quality of the business will make it easier to sell later if need be.

If you want help finding a franchise - email me at feedback@davidnilssen.com. Having worked with hundreds of franchise consultants and franchisors, I know who you should consider talking to...and wh o you should not.

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