Dear Entrepreneurs we invite you to a discussion on the most frequently asked questions in franchising and starting a new business. We would be glad to receive your questions, to which our experts will give their feedbacks and answers.
To Begin we have put in some basic questions on franchising, for your understanding, beyond which, we will be able to give you inputs depending upon your queries.
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name or advertising symbol and an individual or group seeking the right to use that Identification in a business. The franchise agreement governs the method for conducting business between the two parties. Although forms of franchising have been in use over several decades, enormous growth has occurred more recently. Industries that rely on franchised businesses to distribute their products and services touch every aspect of life, from automobile sales to education, real estate to fast foods, clothing to travel and almost everything that we can possibly think of.
In its simplest form, a franchiser owns the right to a name or trademark and sells that right to a franchisee. This is known as product/trade name franchising. In the more complex form, known as business format franchising, a broader and ongoing relationship exists between the two parties. Business format franchises often provide a full range of services, including.
- Site selection.
- Product supply.
- Marketing plans.
Generally, a franchisee sells goods or services that are supplied by the franchiser or that meet the franchiser's quality standards.
There are a number of aspects to the franchising method that appeal to prospective business owners. For example, easy access to an established product and a proven method of operating a business reduces the many risks of opening a business. In fact, U.S. Small Business Administration and U.S. Department of Commerce statistics show a significantly lower failure rate for franchised businesses than for other business start-ups. The franchisee purchases not only a trademark, but also the experience and expertise of the franchiser's organization. However, a franchise does not ensure easy success. If you are not prepared for the total commitment of time, energy and financial resources that any business requires, you should stop and reconsider your decision to enter the franchise business.
A franchise typically enables you, the investor or "franchisee," to operate a business. By paying a franchise fee, which may cost several lakh Rupees, you are given a format or system developed by the company ("franchisor"), the right to use the franchisor's name for a limited time, and assistance. For example, the franchisor may help you find a location for your outlet; provide initial training and an operating manual; and advise you on management, marketing, or personnel. Some franchisors offer ongoing support such as monthly newsletters, a toll free telephone number for technical assistance, and periodic workshops or seminars.
Like any other investment, purchasing a franchise is a risk. When selecting a franchise, carefully consider a number of factors, such as the demand for the products or services, likely competition, the franchisor's background, and the level of support you will receive.
- Demand: Is there a demand for the franchisor's products or services in your community? Is the demand seasonal? For example, a woolen wear franchise is likely to do more business in winters. Is there likely to be a continuing demand for the products or services in the future? Is the demand likely to be temporary, such as selling a fad food item? Does the product or service generate repeat business?
- Competition: What is the level of competition, nationally and in your community? How many franchised and company-owned outlets does the franchisor have in your area? How many competing companies sell the same or similar products or services? Are these competing companies well established, with wide name recognition in your community? Do they offer the same goods and services at the same or lower price?
- Your Ability to Operate the Business: Sometimes, franchise systems fail. Will you be able to operate your outlet even if the franchisor goes out of business? Will you need the franchisor's ongoing training, advertising, or other assistance to succeed? Will you have access to the same or other suppliers? Could you conduct the business alone if you must lay off personnel to cut costs?
Name Recognition: A primary reason for purchasing a franchise is the right to associate with the company's name. The more widely recognized the name, the more likely it will draw customers who know its products or services. Therefore, before purchasing a franchise, consider:
- The company's name and how widely recognized it is. -- If it has a registered trademark.
- How long the franchisor has been in operation.
- If the company has a reputation for quality products or services.
- If consumers have filed complaints against the franchise with the consumer protection agency or any other local courts.
- Training and Support Services: Another reason for purchasing a franchise is to obtain support from the franchisor. What training and ongoing support does the franchisor provide? How does their training compare with the training for typical workers in the industry? Could you compete with others who have more formal training? What backgrounds do the current franchise owners have? Do they have prior technical backgrounds or special training that helps them succeed? Do you have a similar background?
- Franchisor's Experience: Many franchisors operate well-established companies with years of experience both in selling goods or services and in managing a franchise system. Some franchisors started by operating their own business. There is no guarantee, however, that a successful entrepreneur can successfully manage a franchise system. Carefully consider how long the franchisor has managed a franchise system. Do you feel comfortable with the franchisor's expertise? If franchisors have little experience in managing a chain of franchises, their promises of guidance, training, and other support may be unreliable.
- Growth: A growing franchise system increases the franchisor's name recognition and may enable you to attract customers. Growth alone does not ensure successful franchisees; a company that grows too quickly may not be able to support its franchisees with all the promised support services. Make sure the franchisor has sufficient financial assets and staff to support the franchisees.
Entrepreneurs in search of a franchise lawyer can start by checking with our suppliers directory, under the franchise lawyers section or by looking up the franchising association of India, where, you will find the relevant contacts.
- Names, addresses and telephone numbers of other franchisees and a proper discussion with them about the entire business, the customer response and the company support.
- Take proper advise on the franchise agreement.
- A fully audited financial statement of the seller if they are a ltd company or a private ltd company. If any other format, request for the information.
- The cost required starting and maintaining the business. Please make special note of working capital or ongoing costs which you may have to incur after starting the business.
- The responsibilities you and the seller will share once you buy a franchise.
- Litigation involving the company or its officers, if any.
- Again, use your professional support to examine all of these issues. Some of the contract terms may be negotiable. Find out before you sign; otherwise, it will be too late.
Perhaps your most important step in evaluating a franchise opportunity is examining your own skills, abilities and experience. The ideal franchisee is a creative, outgoing person who is eager to succeed, but not so independent that he or she resents other people's advice. You must be able to balance your entrepreneurial initiative with a willingness to comply with the business formulas used by the franchiser. Remember, a successful partnership between a franchisee and franchiser involves a mutual understanding of each other's values and achievements.
Determine exactly what you want out of life and what you are willing to sacrifice to achieve your goals. Be honest, rigorous and specific. Ask yourself: Am I qualified for this field
- By experience?
- By education?
- By learning capacity?
Ask yourself how this decision will affect your family. Do they understand the risks and sacrifices required, and will they support your efforts? Beginning a franchise business is a major decision that does not ensure easy success. However, an informed commitment of time, energy and money by you and your family can lead to an exciting and profitable venture.
Attending a franchise exhibition allows you to view and compare a variety of franchise possibilities. Keep in mind that exhibitors at the exposition primarily want to sell their franchise systems. Be cautious of salespersons that are interested in selling a franchise that you are not interested in.
Before you attend, research what type of franchise best suits your investment limitations, experience, and goals. When you attend, comparison shop for the opportunity that best suits your needs and ask questions.
- Know How Much You Can Invest: An exhibitor may tell you how much you can afford to invest or that you can't afford to pass up this opportunity. Before beginning to explore investment options, consider the amount you feel comfortable investing and the maximum amount you can afford.
Know What Type of Business is Right for You: An exhibitor may attempt to convince you that an opportunity is perfect for you. Only you can make that determination. Consider the industry that interests you before selecting a specific franchise system. Ask yourself the following questions:
- Have you considered working in that industry before?
- Can you see yourself engaged in that line of work for the next twenty years?
- Do you have the necessary background or skills?
Comparison Shop: Visit several franchise exhibitors engaged in the type of industry that appeals to you. Listen to the exhibitors' presentations and discussions with other interested consumers. Get answers to the following questions:
- How long has the franchisor been in business?
- How many franchised outlets currently exist? Where are they located?
- How much is the initial franchise fee and any additional start-up costs? Are there any continuing royalty payments? How much?
- What management, technical, and ongoing assistance does the franchisor offer?
- What controls does the franchisor impose?
- Get Substantiation for Any Earnings Representations: Some franchisors may tell you how much you can earn if you invest in their franchise system or how current franchisees in their system are performing. Be careful. Make sure you ask for and obtain written substantiation for any income projections, or income or profit claims and get a opinion from a chartered accountant. If the franchisor does not have the required substantiation, or refuses to provide it to you, consider its claims to be suspect.
- Take Notes: It may be difficult to remember each franchise exhibit. Bring a pad and pen to take notes. Get promotional literature that you can review. Take the exhibitors' business cards so you can contact them later with any additional questions. Avoid detailed questions at the booth, and schedule meetings after the expo for a 1-1 discussion, to understand properly.
- Avoid High Pressure Sales Tactics: You may be told that the franchisor's offering is limited, that there is only one territory left, or that this is a one-time reduced franchise sales price. Do not feel pressured to make any commitment. Legitimate franchisors expect you to comparison shop and to investigate their offering. A good deal today should be available tomorrow.
- Study the Franchisor's Offering: Do not sign any contract or make any payment until you have the opportunity to investigate the franchisor's offering thoroughly. Take time to speak with current and former franchisees about their experiences. Because investing in a franchise can entail a significant investment, you should have an attorney review the document and franchise contract and have an accountant review the company's financial disclosures or engage a reputed franchise consultant who can help you on all of the above.
Before you invest in a franchise system, investigate the franchisor thoroughly. In addition to reading the company's disclosure document and speaking with current and former franchisees, you should speak with the following:
- Lawyer and Accountant: Investing in a franchise is costly. An accountant can help you understand the company's financial statements, develop a business plan, and assess any earnings projections and the assumptions upon which they are based. An accountant can help you pick a franchise system that is best suited to your investment resources and your goals. Franchise contracts are usually long and complex. A contract problem that arises after you have signed the contract may be impossible or very expensive to fix. A lawyer will help you to understand your obligations under the contract, so you will not be surprised later. Choose a lawyer who is experienced in franchise matters. It is best to rely upon your own lawyer or accountant, rather than those of the franchisor.
- Banks and Other Financial Institutions: These organizations may provide an unbiased view of the franchise opportunity you are considering. Your banker should be able to help you understand clearly your financial implications and the franchise business you are exploring.
- Consumer Complaints: Check through the internet, if you see some complaints or issues about the company. You can also reach your local consumer grievances cells and Ask if any consumers have complained about the company's products, services, or personnel.