Levi’s, McDonald’s, Burger King, Pizza Hut are the brand names that have used the franchise model of business to succeed. A model where they offer the same “brand” experience to customers visiting any of their outlets.
Such is the similarity in their stores (in terms of looks) that at times, you tend to relate the ambience of their stores to the brand. McDonald’s for example always has those wooden chairs, small tables and kid’s meal.
Likewise, Domino’s does not offer you cutlery (in India) to help you eat pizzas. They want us to feel the food and eat it with our hands. Yanks might call it Gross! We, kind of like it 😊 (we are loving it!)
2017 was a good year for franchise style of businesses.
Consider this – In the year 2017, there were 745,078 franchisees operational in the United States and the number of franchise units grew at an average of 1.6%.
Furthermore, the franchise employment saw an increase of 3.1%. (source: https://1851franchise.com/10-franchise-industry-statistics-2705340)
And this is the reason, the franchise blog gets a mention in my startup and entrepreneurship blog.
How did I learn about Franchisee style of Business?
I have helped a business (JobRidge) design and develop a plan and execute it (to an extent) as a franchisor. In addition to helping a business where we were the franchisors, I also had the opportunity of sitting on the other side of the table as a franchise.
My father was opening an F & B unit in their city and he wanted my help to get a good brand name to help them with teething troubles or help them save the agony of running a business on an experimental basis.
See, I told you – I have been at both sides of the table. Thereby, making me an apt candidate to answer all questions/queries about franchise business (without any prejudices 😉).
My fascination with franchise style of business goes way back.
In my initial entrepreneurial years, I always made it a point to visit franchise expo events in my city.
What would I do there?
To start with, I would go and visit almost every stall in the franchise expo and understand their business model.
There were franchisors with unique business models ranging from 1 L investment per month to million in Initial from different lines of businesses. I mean, there were companies from the education domain, healthcare, F & B, Home services, Laptop repair, education training, etc, etc.
It was an enchanting experience.
Frankly speaking – That time, I had no idea how all the information would help me. I just learned it for the heck of understanding unique business models.
As far as I was concerned, I was busy doing the techie thing in my company and our main business focus was – IT Services.
Still, it was a Pilgrimage – I never missed.
My first business model built on Franchisee style of Business:
Around 6 to 7 years back – all that I learned, finally came to use (as they say, knowledge never goes waste).
I was working as a small business consultant for a job portal – JobRidge.
My role and responsibility were to help them with the portal development (the techie stuff) and help them design a business plan which can help them grow fast (yes. I know – The Cliché “Grow Fast”).
I did some research and realized most of the job portals ran on the same business model of employer-employee.
There was nothing unique in them and space seemed cluttered.
And since this job portal catered to tier-2 and tier-3 industrial cities, the same old business model was out of the question.
Then I had my Eureka moment! I was sitting under the tree and an apple fell on my head and I went “I found it”. (bad joke – even Archimedes and Newton didn’t find it funny!)
Jokes apart! I pitched the idea of building a business model based on the franchise business model.
The idea seemed challenging but the team liked it and they were all game to pull it off.
All that I had learned for years how to run franchisee style of business was finally going to be fruitfull. Now was the time to put all my theoretical knowledge to practical use.
Their portal already was doing decent business catering to employees looking for jobs in Industries working on a mix offline + online business model.
Their online model was similar to the model of every web-based job website and through, it did the job to an extent, for companies in finding candidates – it never really gave excellent results.
One of the reasons for the failure of portal to attract too many candidates was the limited internet penetration in small cities in India (those who have seen India grow in last 5 years back will know what I am talking about).
Since their brand had done decent business in their own city – I encouraged them to give franchisees of their brand in other tier-2 or tier-3 cities that had industries.
This was supposed to help them reach to more candidates who did not have a decent internet connection. When we got vacancies from industries, we could push the information as sms to our paid members.
We designed a business model where all our franchisees had to do was give a fixed franchise fee of 25K and spend around 8 to 10K INR in allocating a space to us in their existing business (for branding purpose).
They would get a 50% commission on every vacancy or paid candidate registered through them.
We, as the franchiser were to handle all I.T back-end operations, training and after-sales support. They were our front face in their city and were to handle marketing and sales.
As per our past experience, we had estimated a profit of around 20 to 30K for a franchise running in a small city.
The money might sound small to you. However, it was an added income to their existing businesses with a very small investment.
Also, 6 to 7 years back when we were a lot simpler – 20 to 30K was a decent earning in a small city.
It was a perfect partnership business model in between us and the franchises.
Anyways, I am going to discuss the business model in detail when I do a blog on how to run a job portal.
Key points about franchisee style of Business:
As of now, all you must understand are the following important points before taking a franchise or getting into this business:
- Franchisors expect you to pay a one-time fee to use their brand name.
- Franchisors would want you to invest money in building an infrastructure.
- Franchisors will take a % of sales you do at your end.
- Franchisors will help you with training and support (online/offline) depending on their business model.
In a nutshell, franchisors are giving you their brand name. A brand name, they have spent years building upon.
They will charge you a royalty for the brand name in terms of a onetime fee and a % of all sales done by your unit.
Pros and Cons of having a Franchisee:
Here are the pros of owning a franchise:
- You get a platform to start :
Imagine a scenario where you start a new venture with a fresh brand name. I am sure, you do not expect customers to flock to your store/unit from day one.
They will take their own sweet time, waiting for reviews from others and then, trying your stuff.
The problem is – your expenses start from day one.
All the sweet time, the customers will take in getting acquainted with your brand might not be sweet for you. As every damn expense will start from day one for you.
Now this pain of getting to become a brand name can be taken away by taking a franchise
What if a big brand gives you their name and instead of starting a new store, you become an extended arm of an established brand name. A brand, people easily identify with.
Now the city does not have some unknown XYZ brand asking it to try their food. Instead, they have a famous chain opening another outlet in the city.
The whole city cannot wait to see this famous bran opening its outlet in the city.
You get the point. That’s the biggest advantage you will have in becoming a franchisee of a known brand.
- You can start any Business of your choice:
This might not mean a lot to many of us who like to be in our comfort zone and do things, we have been trained to do.
However, think of those who want to follow their passion or think of Indian dads, who still must find a way to “employ their spoiled brats” (please ignore my harsh language. It’s a bitter truth of our society. I still see so many parents looking for opportunities for the “Chirag of their house”).
So, where was I?
Okay. Opening a franchise allows you to start a business you always wanted to do. For example, you always wanted to start a sweet store or wanted to start a retail store but had no clue about how these businesses worked.
Worry not! There are companies who will teach you the trick of trade by giving you their SOPs and training – to help you run a successful business.
Within a few months, you will be ready to run a business you always wanted to run and live your dream.
- The invaluable help in running operations, marketing and finance:
Starting a business is just half the job. The real test lies in running the business.
The biggest benefit you stand to gain as a franchise is the operations support from franchisors. As far as I know, most of the good franchisors have a dedicated team to help you succeed.
For them, your success means their success as they stand to gain a substantial amount of % from your unit.
I have heard of sales and support team of franchisors camping in the cities where franchisees are not able to meet targets and working around the clock to sort out issues faces by franchises.
This support is invaluable.
You also stand to gain in terms of advertisements done by the brand on TVs and other mediums. For example, a burger king advertisement running on TV is an ad for all their outlets.
Think of a scenario where you had to spend money to promote your brand on TV.
I personally cannot think of spending money to advertise on TV. Their one-month budget might be equivalent to my marketing & sales budget for two years 😊. Small businesses stand to gain a lot by taking franchisees.
Add to above, the backend support you will have in terms of software, training material and HR (some franchisors are known to even provide help with staffing).
Lastly, franchisors will (at times) help you raise funds too.
And, that brings me to the end of making you “feel good”.
Let’s head for some criticism of owning a franchise.
Here are the cons of having a franchise:
- You never get to build your “Own Brand”:
“Aw, who needs my brand. All I care about is money!” – If that’s your thought process. Dude! Your marriage to a franchise style of business is long term.
On the contrary, if you are someone who likes to build your own brand. A name, everyone identifies your business with – franchisee style business is not for you.
I fall into the class of people who like to build their own brand. Hence, I am not a big fan of starting a franchise.
Around 8 years back, I met a gentleman who gave me a truck full of B.S about a new line of business that has made millions of people rich in the shortest time possible.
Sounds like a Ponzi scheme. Right?
I was too young to understand, and my struggling business wasn’t giving me enough confidence to get rich quickly 😉.
Therefore, I decided to meet the gentleman. Only to learn about Amway!
I immediately stopped him in middle of the pitch and told him that I like to work on building my pawn brand. He said, “he liked to follow the footsteps of successful people”. End of story!
He was the franchise style of guy (MLM is also another franchise style of business with a different business model).
Getting back to the point. With franchises, people will always identify you like burger king outlet or Levi’s outlet or a McDonald outlet.
You lose your personal identity.
I don’t know what it means to you but It’s a big thing for me.
The choice is yours.
- The franchise license cost and sales commission % can be a bummer:
All good things in life come with a commitment. Think of house, car, family – you have a commitment to all of them.
Likewise, with franchisee style of business, you have a commitment to meet minimum targets.
There will be times, franchisors will sign an agreement with you for a commitment at your end to pay Min X amount of money every month (irrespective of the sales done by you).
If things go south (do not forget 8 out of 10 startups fail), you are doomed.
You have already paid franchisors a huge license fees and now, you will be paying from your nose.
Plainly speaking, I am not a big fan of businesses which start with a huge investment. I am a fan of bootstrapped startups as they find their way, growing through adverse times.
The big brands in franchise business come with their own Terms & Conditions which include huge investments, business commitments, etc, etc and they small ones – the ones, who are too easy to negotiate do not have a proper support system.
When my dad’s business went south, the franchisor – a famous restaurant brand name was nowhere to be seen. All they called us was for their franchise fees.
Despite all his reluctance to pay the %, he had to oblige them because the agreements he signed were all in favour of franchisors.
All the Franchisors spend a lot of money on “legal” services. I vividly remember a VP of a big chain telling me, “Once you decide to join us, we will sign an agreement which will obviously be all in our favour “and then he let out a big laugh. (I felt like punching him on his face for saying that. Yeah, I know – that was an obnoxious thought but the younger me did have these impulsive nasty feelings ☹ )
- Staff Hiring Issues:
This one is specifically for those who plan to start franchisee in a small town or city and the franchise depends on the skill set of employees. i.e, it’s a service driven franchisee.
The best example I can think of is an Indian Restaurant food chain opening a restaurant in a small city.
Here is a food for thought (since we are talking food chain) “The food Indian restaurant prepares comprises of 1000 of ingredients and franchisees have their own set of flagship dishes to prepare”.
When I asked one of the franchisors about the training they will offer. They said, “their head office is in Mumbai – A place, thousands of kms away from our city and they can train our staff only through web-based training”.
Now, how on the holy earth where we supposed to get staff and teach them to prepare dishes of the famous Chef via web.
We dropped the idea and went to another company which promised us staff services – only to regret it later.
This company (we learned later) was into staffing services too and would always force upon extra staff on us so that they could charge a % from salaries of staff sent by us.
I don’t know how much time we wasted going back and forth with them on staffing troubles. They thought we were understaffed and we thought we were overstaffed with some over expensive guys sent by them.
Just when you thought, it was sorted with them – the situation really went downhill from there. They hijacked (technically stole) some of our staff for a new franchise of theirs which was opening in the next few months.
I learned – it was a common practice for them. To support a new franchise, they picked staff from old franchisees without keeping them in the loop.
It was a Disaster!
Anyways, we learned the business in the next few months and stopped taking any staff from them.
Their brand helped us get a start and after that, it all came down to our skill set.
You might face other support issues like training issues and if you are someone who does not like to follow dictums of others. Think again, you are technically an extended arm of some other business.
You must work as per their whims and fancies.
There are times, you will feel claustrophobic because you have spent so much money in buying the franchise and have spent a fortune in building a store/unit as per demands of franchisors and you cannot even move a finger without their permission.
For instance, you have to take permission to change store outlay or implement a new strategy.
To sum up, you will see yourself asking a question – “Whose business is it anyway?”
I might sound a little biased towards not going for a franchise but that’s me.
World over, Franchise style of businesses has done well for years.
As far as numbers are concerned, I am quoting from franchise Asia “The franchise industry is growing at a rate of 30-35% per annum and the sales turnover of the sector was recently valued at over US$7 billion.” (source : https://india.franchiseasia.com/information/indian-franchise-industry-outlook-for-2018)
Numbers support the growing demand of franchise business in India and other parts of the world.
Moving to FAQs about franchise business:
- How do you franchise a business?
To franchise a business, you must design and develop a business model where your brand can benefit a person who takes your franchise. Think of key parameters like:
- What is it that a franchise stands to gain from my business?
- How much should I charge them for my brand value and what should be the sales % I should ask for?
- How will I support a franchise?
I strongly recommend that you do your research and use your past experiences before planning to franchise your business.
- What is the best franchise business to own?
That’s a tough question. It all depends on your investment capability, your passion and the ROI you expect on your investment. Not to forget, the demand of franchise in your city.
For ex, I see no point in starting a luxury resort in a small city with no tourists to speak of.
I cannot tell you the best franchise business to own but I can tell you the popular franchises to own.
- As per franchise.org “Fast Food Franchise business is the most popular franchise business in the US” (source : https://www.franchise.org/stats-franchising%E2%80%99s-deep-impact)
- The market value of the food and beverage industry was US$26 billion in 2017; this figure is projected to increase to US$46 billion within two years (source : https://india.franchiseasia.com/information/indian-franchise-industry-outlook-for-2018)
All pointers point to F & B industry being the numero uno franchise style of business.
- How much do you need to start a franchise?
Again, that’s a very business specific question. You must do your groundwork before finding the investment you will need to start a franchise. Since you are asking for money to start, I am listing some pointers to help you with the starting cost:
- License Fees Cost (one time).
- Infrastructure Cost (lease, advance, interiors, furniture)
- Staff Training cost (you might have to travel to the head office of the franchisor. Keep the cost in mind)
- Initial training material cost (some companies charge you for it).
- Initial stock cost (you are required to buy some min. amount from franchisors to start a business)
- Software cost
- How to get small business loans for a franchise?
How to raise funds for a startup or a small business is a question everyone has. Consider a franchise to be like any other small business. You can submit a business proposal to a bank for a business loan. There are govt schemes to help you fund your business.
- Can I get a Franchise business Plan Example?
I suggest, you visit bplans.com and use their paid service to quickly design and develop a franchise business Plan. I have used their service in past and their ready to use templates are a good starting point to quickly guide you through the process.
And that’s the end of the franchise blog. Phew! Wasn’t that long 🙂
Feel free to ask any queries you might have about starting or running a franchise style of business.