For a variety of reasons, many people want to run their own business. These range from a desire to be your own boss through to “buying” yourself a job if you’re mature aged and have received a redundancy payout. Whatever the motivation, it’s not a decision to be taken lightly, as the failure rate of small businesses within the first few years of operation is relatively high.
If you do you want to run your own business, you have two basic options – either start one up yourself independently, or buy an existing one. Franchising is a form of buying an existing business. If you’re thinking of becoming a franchisee or a franchisor, choosing the right franchise model for you is an important decision.
This article outlines the most common models and the issues you should consider before choosing the best one for you. Each franchise model has its pro and cons and you should talk to different people who have experience in each type if you can.
But first, we’ll give you a basic overview of how franchises work.
How franchises work
A franchise is an agreement where one party (a franchisor) grants another party (a franchisee) the right to conduct a business using the franchisor’s name, logo and/or trademark, systems and marketing plans.
The franchisee pays the franchisor for this privilege, usually via a fixed amount to enter the franchise agreement plus an on-going percentage of the revenue they earn. Financial obligations vary from franchise to franchise, but are set out in franchise agreements.
A franchise can be an effective way of reducing the risk of business failure, with a franchisee potentially buying into a successfully established system, tapping into group buying power and branding, as well as getting up and running relatively quickly.
But franchising also contains its fair share of failures as well as success stories. Running any business is a challenge and involves some risk. You should ensure you conduct due diligence before entering into any franchise agreement.
When the franchising concept started growing in popularity in the 1960 and 70s, it was on the back of the traditional bricks and mortar retail store model. Franchises grew by appointing franchisees to operate physical stores in different locations. That model was really the only option. But modern technology allows for different franchise business models. The two most common are home-based and mobile franchises.
Bricks and mortar model
The traditional model is still very popular and is suited to businesses like restaurants, hotels and gyms. Think McDonald’s and other major fast food outlets, as well as hotels like Accor and gyms like Anytime Fitness.
There is an old cliché that “location, location and location” are the three most important factors when choosing real estate. These same factors are crucial for a bricks and mortar franchise. To have a successful retail store you need significant numbers of customers regularly coming to you. You can attract customers via your marketing efforts, or from walk-in customer traffic.
Retail stores need to be easy to find and are best suited to highly populated areas like shopping centres to maximise the potential for walk-in traffic. They also need to be well-maintained and enticing to attract customers. The franchise agreement will typically outline in detail how a franchisee must present their store (including all store signage, staff uniforms and promotional material) to ensure consistency across the franchise.
The bricks and mortar retail franchise model is suited to people who like customers to come to them, but it is expensive. The more popular the area where you want to locate your store, the higher your rent or the freehold purchase price of your business premises will be.
If you’re wanting to become a franchisee, you need to do due diligence on the location of your potential store and its suitability. Don’t just rely on information provided by your franchisor. Seek independent, professional advice from your accountant, financial adviser, lawyer and commercial real estate broker.
As the name suggests, a home-based franchise allows you to have the convenience of working from home. Modern technology (e.g. the internet) allows many business tasks to be performed efficiently from the comfort of your own home. Common examples of home-based franchises include consultancy and accounting services. The franchise agreement will set out how home-based franchise activities are conducted.
Besides the convenience of working from home, a home-based franchise model typically has lower business overhead costs. For example, you don’t have to pay rent or for freehold business premises to conduct your activities.
But not everyone is suited to working from home. For example, there can be a lot of distractions (like children and pets) and it can be harder for you to focus on work. If you’re not a good time manager and if you don’t have a suitable space to work, a home-based franchise model may not be a good idea for you.
Another potential drawback to working from home is that it blurs your home and work life. One or the other may suffer.
A mobile franchise business isn’t tied to a specific location. Unlike the bricks and mortar model, mobile franchisees travel to their customers rather than having their customers come to them.
The mobile franchise model suits businesses like service providers who can bring anything they need with them. Think cleaning services or mechanical repairs on cars, where the work must (or can) be done at the customer’s home. Delivery services like couriers or food vans are other examples, with the service or product being delivered at a location that suits the customer.
Mobile franchises don’t rely on walk-in traffic like the bricks and mortar model, so as a franchisee you need to be confident that your marketing efforts (or those of your franchisor) will generate the demand for your product or service. You’ll also need to make sure you’re always well-equipped with everything you need when you’re “on the road”. That includes taking advantage of all relevant modern communication technology to operate efficiently when you’re out and about.
Did we miss any tips regarding franchise models? Let us know in the comments below!