The Franchisee Manual from Down Under

Over the past three years, businesses operated as franchises have suffered from some of the underlying factors that have been a drag on the economy. The International Franchise Association (IFA), however, sees indications of some acceleration in the number of franchise businesses in the US for 2012:

  • The number of franchise establishments in the United States will increase by 1.9% in 2012.
  • Employment growth in franchise establishments rebounded in 2011 to post a gain of 1.9%, more than keeping pace with employment growth economy-wide, which trend continuing in 2012, with franchise business employment increasing 2.1%.
  • Output (sales) of franchise businesses increased by 5.3% in nominal dollar terms in 2011 and IFA expects growth of 5.0% in 2012.

While the negative impact of the economy on consumer spending and availability of small business credit have affected the franchise industry, just like with every bad thing something positive comes along.
An increasing number of people, not finding the right job for an extended period of time, are more willing to take their fate into their own hands and start a business on their own. The three options are still the same:

  1. startup from scratch
  2. acquisition of an independent business
  3. becoming a franchisee

In the US 735,571 franchise establishments employed over eight million workers and contributed 782 billion dollars to the economy in 2011, which accounted for 4.8% of the GDP.

Before joining this group, it’s important to explore both sides of franchises to determine if it’s the right business model for you.

Advantages

One of the first advantages to franchises is the established name. Name recognition can go a long way toward moving merchandise. A small business that is not a franchise will have to spend a good deal of time and capital establishing a solid track record and name recognition. A franchise likely already has this.

Corporate marketing is another advantage. While individual franchises will do their own advertising and marketing, the corporate entity will still be doing their own work towards promoting the business name.

Money can also be saved on equipment and inventory. Franchises will have bulk purchasing power because franchises typically must feature the same brands and equipment throughout their satellite locations.

Franchise owners will also have the benefit of other franchisee’s past experiences. Routine meetings and strategy guides can help them navigate the tricky world of small business. While there will be some trial and error, franchises come with a playbook of sorts that may offer guidelines and strategies for success.

Disadvantages

Some of the advantages to franchises can also be disadvantages, depending on one’s perspective. For example, working under the auspices of a larger entity restricts some of the creative freedom a small business owner might want. In general, franchisees must discuss ideas and decisions for the business with the franchisors before execution.

Franchisees are expected to pay dues to the franchisor. While money may be saved on other aspects of franchise ownership, the average royalty fees paid by franchisees range from 3 to 8 percent of monthly gross sales, and mandatory coop advertising can also account for another 4 percent. Keep in mind that these percentages are coming off of your top of the line revenue and can dramatically affect your margin.

Any business venture will require an initial investment. However, franchise investment could be considerable.

Before choosing a franchise it is important to do ones thorough homework. Franchise scams, warning signs, features you should look out for, or matching your own abilities to the challenge are only a few chapters from an extremely useful guide for future franchisees, which we had to fly to the other side of Globe for. – Thankfully, only virtually.
As we studied the available information on this subject we’ve come across The Franchisee Manual, a publication of the Australian Competition and Consumer Commission. An absolutely recommended reading.

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