Business Opportunities versus Franchises ?
TRADITIONAL FRANCHISE STRUCTURING
This is an issue which raises debate from time to time but it can be loosely stated that:
- The term ''Franchise'' does not strictly define that the same set of characteristics will be applied to every franchise.
- There is a 'grey area' where a business claiming to be a franchise would perhaps be more accurately categorised as a Business Opportunity.
- A franchised business would normally always offer these components:
- The right to use the brandname.
- An undertaking that one could trade with sole rights within a defined geographical area.
- The franchisor will take a direct interest in the maintenance of standards to protect the brandname.
- A contractual agreement which specifies the rights and obligations of both parties and known as the 'franchise agreement'.
- A franchise fee is payable as a once-off upfront charge to purchase into the goodwill of the franchise, secure the area rights, and receive the setup services.
- The Setup Services would typically include:
- Manuals and guides which detail the operating procedures
- Assistance with the selection and outfitting of premises
- Training of the owner/operator
- Assistance with selection and training of staff
- Advertising and promotional material and help for the initial launch
- Some, or perhaps even none, of the following components would be used:
- A turnover royalty
- A contribution to national and/or regional advertising
- Ongoing training and conference events.
- Insistance on purchasing consumable product from the franchisor.
- A business plan is offered, usually along with equipment and startup stock and consumables.
- The purchase capital and working capital requirements are usually much lower than for franchises.
- The product line and the potential size of each outlet is normally smaller than for franchises. The product is often an auxilliary line which complements other products or services. Kiosk operations and speciality counters for gift and novelty shops are typical examples.
- The buyer can trade under the name of choice, but the option to use a brandname may be available.
- The seller may undertake not to sell to anyone else within the buyer's operating area but this would only be enforceable if all parties signed binding agreements to that fact
- Quite often there is no need for any further or ongoing contact with the seller of the business opportunity.
COMMONLY HELD PERCEPTIONS
While not always valid, it is accepted that most people believe that:
- A franchise has less chance of failure due to the fact that tried and tested operating procedures are applied which have been successful elsewhere. Should the franchisee experience difficulties then the franchisor would take an active interest in the rescue to protect the brandname. In other words, "you are not alone in your franchise venture".
- It is easier to obtain external financing for the purchase of a franchise, especially one with a well known brandname.
- Some franchisors enforce a high royalty fee, usually based on turnover, which depletes the franchisee's funds available for reinvestment. Business opportunities, typically, would not charge any royalty fees.
- The franchise agreement, in some cases, can be very restrictive in terms of what the franchisee may, or may not, do. This could restrict the operators entrepreneurial opportunities.