Franchising is a type of business agreement that falls somewhere between buying a business and starting your own business. This is an agreement between a franchisor (Burger King, Subway, Mail Boxes, etc.) and you, the sole proprietor, called a franchisee.

The franchisor offers its established corporate brand, experience, knowledge, training, support and proven methodology to the franchisee. In return, the franchisee pays an upfront fee and ongoing royalties.

I mention the franchise in the context of Bootstrapping, as it almost completely solves the experience/knowledge part of the limited resource equation. On the cost side, many franchises will be clearly out of reach for most new businesses. However, the franchise industry is so large and diverse that many have a relatively low start-up cost. Recently Entrepreneur The magazine had an article about 80+ franchises that required a start-up cost of $25,000 or less. (Entrepreneur.com)

Franchising is a huge business sector. There are more than 300 types of business categories supporting more than 18,000,000 employees and representing 3% of US gross domestic product (GDP). There are many and varied business categories available for franchises. A partial list of the different franchise businesses is Automotive, Business Services, Children’s Products and Services, Education Financial Services, Food, Health Care, Home Improvement, Hotels and Motels, Maintenance, Personal Care, Pets, Recreation, Business of services and technology, and more each year.

Jeffrey Tannenbaum, the former wall street journal franchise expert, described the franchise as a mixed bag. He said, “For many people, becoming a franchisee is the shortcut to prosperity, but for others, it’s the shortcut to hell.”

Let’s look at the pros and cons of the franchise.

ADVANTAGE

• It allows you to be in your own business. with limited knowledge of the industry and how to run a business. You get the advantage of the franchisor’s proven track record of success, their training, their operating methods, their suppliers, their credibility, their ongoing support, etc.
• some important risks of business failure are reduced.
• Quick start to get your business up and running. All facets of starting and running the business are provided to you. An entrepreneur, starting out on their own, would take considerably longer to get started.
• Expansion: If you are successful, you can expand quite quickly thanks to the experience and cooperation of the franchisor. They are eager to discover successful traders who have proven they have what it takes to grow. Sometimes the franchisor will block your expansion plans, despite their proven success. If this happens, you can take inspiration from Sam Walton, the founder of Wal-Mart. Sam’s initial entry into retail was as a franchisee of Ben Franklin 5 & 10 Cent stores. He followed his formula and added his creativity and work ethic to become a leading franchisee. He began to expand into neighboring Arkansas cities. Early on, Sam saw the advent of discount retail stores. He approached Ben Franklin’s management to allow him to pioneer a discount store under his umbrella. He was summarily fired and Wal-Mart was born. Little did Ben Franklin’s leadership realize how profoundly they would affect the history of retail.
• Due diligence: Franchising is a highly regulated business. By law, every potential franchisee who requests it must have a Franchise Disclosure Document of the Franchisor. This will give you details of the agreement with the franchisees, the financial strength of the franchisors, their list of existing franchisees, and in many cases, lists of previous franchisees. You want to know as much as you can about your potential partner.
• Training is provided to you and your employees. The learning curve of running a business accelerates.
• In most cases Advertising and marketing of the brand is provided. In some cases, you may have to contribute to the costs of it.
• Territory: You are assigned an exclusive Franchise for a specific geographic area. No one else can use your brand in this defined area. This provision must be specifically specified in the contract.

DISADVANTAGES

• Lack of control: You don’t have the independence of a business owner. The Franchisor requires that you strictly follow its rules and use its systems. Changes require approval. You are also limited in where to buy your supplies, how to advertise, what products you can and cannot offer, volume targets, etc. The arrangement can be frustrating for a creative personality.
• costs can be high, both the initial fee and ongoing royalties. However, costs should never be considered in a vacuum. They need to be measured against the profits you create.
• Royalties they are paid on volume and not profit in most cases. This is usually not a big deal, as one party may lose money while the other benefits. Their interests are not aligned even though it is an association.
• Inequality: It is an unequal association. The franchisor has much more power. If the franchisor does not follow through on their support promises, you may not have much recourse, as most contracts favor the franchisor. Also, you may not have the money to pursue your expensive legal options.
• selling the company it can be hard. Let’s say you’ve been successful over the years in building your franchise and now want to retire or change your lifestyle. In an independent business, you are completely free to sell to anyone at any price you want. This is not necessarily so for a franchisee. Some contracts will not allow you to sell, or you will only be able to sell back to the Franchisor. This might not allow you to get a fair price. Therefore, you should try to address this issue in your original contract.