Are franchises safe bet for startups?

How ‘Franchising’ helps reach out to people...

In today’s dynamic market, franchises are a safe bet for startup entrepreneurs. Or are they?

Franchising is a very good way for any brand to increase its reach and presence, and make revenue along the way. But there are many factors that one needs to keep in mind while planning to buy a franchisee.

Why take a franchisee?

One needs to be clear about why one would invest into a franchisee rather than starting up his own brands.

Branding: Taking a franchisee gives an entrepreneur the benefit of working with a ready brand.

Limited Investment: Expertise costs, designing costs and opportunity cost during long gestation, all reduce to a considerable extent while taking a franchisee.

Support: While taking a franchisee, one gets ample support and guidance from the franchiser about market research and business processes.

What you need to know?

Like any other business, there are certain things one needs to be well aware of before buying a franchisee:

  1. Franchisee or license fee: Different industries and companies have different franchisee fees. These franchisee fees could be of a few different types:
  1. One-time fee: This means that the fee is taken once on agreement signing. Post that the only amount taken will be the royalty.
  2. Three Year Agreement: This is one of the most popularly followed norms for licensing and agreements. The franchisee fee is taken for an agreement period of three years. Post that the agreement is revisited and the fee is charged again after suitable appreciation.
  3. One Year Agreement: This type is quite popular as well. In this type the agreement is for a year. Often there is no monthly royalty charged, only a hefty yearly license fee that the franchisee has to pay.
  1. Royalty Percentage: Franchisees have to pay the franchiser a certain profit share for the revenue made on the brand. Different industries have different royalty percentages on basis of material support given in return.
  1. More than 50 per cent Royalty: When a brand provides the franchisee with raw material and infrastructure requirements, they ordinarily charge a royalty more than 50 per cent. The exact percentage depends on the cost of infrastructure and raw materials.
  2. Less that 50 per cent Royalty: In industries where there is no regular raw material requirement, or low raw material and infrastructure cost, or the franchiser does not provide the franchisee with the same; the royalty percentage is less than 50 per cent. The exact percentage differs from industry prevalence and economy,
  1. Brand Requirements: Franchisees always have a certain degree of uniformity and other requirement. It is important to be mindful of these requirements. A few examples are:
  1. Interior branding like colour or walls and other infrastructure.
  2. Location of the setup.
  3. Number of employees on startup.
  4. Educational qualifications of the franchisee buyer
  5. Local know-how or personal network or the franchisee buyer, etc
  1. Registration and Legalities: It is important for any entrepreneur to do a complete background check of the registrations and legalities of the franchiser.
  1. Always check the PAN card of the franchiser. A company getting into franchising requires having a legal PAN card and Gumastadhara certificate (Shop Act License).
  2. Note that one needs to be a company to take a franchisee. If a franchiser is willing to give an individual the franchisee, something is amiss. A franchisee agreement always takes place between two companies, not individuals.
  3. Before you go into agreement signing, paying any advance or the license fee or even registering your firm, visit the corporate office and head office of the franchisee provider. This will give you an idea about their authenticity and a feel of how operations take place in the organization.

Both small and big organizations get into franchising. It is the choice of the franchisee buyer to decide if they wish to be a part of a new brand or a well-established one. Either way, if things are authentic and support is right, franchisee business is a good way to start your enterprise.

Would you invest into a franchises  for your business? Do share your views.

 

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