Franchises are very popular at the moment and more and more people are choosing to buy one as opposed to starting out by setting up their own business.
By purchasing a franchise you are effectively taking advantage of the success of an already established business. As the ‘franchisee’, you are buying a license to use the name, products, services, and management support systems of the “franchiser” company. This license normally covers a particular geographical area and runs for a limited time. The downside to a franchise is that you will never actually legally own the business.
As a franchisee, the way you pay for the franchise may be through an initial fee, ongoing management fees, a share of your turnover, or a combination of these depending on how you have set up the franchise.
A franchise business can take different legal forms – most are sole traders, partnerships or limited companies. Whatever the structure, the franchisee’s freedom to manage the business is limited by the terms of the franchise agreement.
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Is it worth investing in a Business Franchise?
The simple answer is yes. However, it is important that you follow some careful steps before buying into a Business Franchise.
The good news is that there is information to suggest that the Franchise Business sector is still growing rapidly. During 2007 the Nat West Bank carried out a survey into the UK franchise market which revealed the astonishing financial growth of this sector. The approximate annual turnover of the business franchise sector is in excess of £10.8 billion. What is more interesting to note is that the vast majority of Business franchisees are in profit – a total of 93% to be exact! In 1991 the total number of profitable franchisees was 70% and in 2004 it was 88%. Therefore, this business sector is growing and there is a reason for it.
Why is it growing?
The simple reason is that a Business Franchise is usually tested first before it goes to market. If it works in one area, then there is a very strong chance that it will grow in others. As an example, take a moment to think about popular franchises such as Dominoes or McDonalds. They are literally everywhere, proving the fact that if there is demand in one area of the country, there will be similar demand elsewhere. The reason for this is because generally we are all the same, as people that is and we tend to follow trends. If 100 people like eating Dominoes pizza, then eventually there will be 100,000 that do! It’s simple science but it is worth thinking about when buying a franchise. The only downside to this philosophy is that the more demand there is, the higher the cost of the franchise.
Getting in at the right time.
The most effective way to turn your initial franchise investment into a successful profit is to buy in at the right time. That is, to buy into a franchise in a ‘key’ area and at a time when the franchise is generally unknown to the masses. The benefit of this method is that is a franchise is new and not very well known, the vendor cannot demand a high price for their franchise. The downside to this method is that you, as the franchisee, take the risk that the business as a whole may not grow into a hugely successful business.
Carry out lots of research before you commit.
The first piece of advice, and probably the most important, is not to part with your cash until you are absolutely sure you will see a return on your investment (ROI). Do not, and I repeat, do not part with your cash simply because you are eager to ‘own’ a business. Owning a business may appear to be exciting and a way of impressing your circle of friends, but in reality it is hard work and often difficult to get off the ground. That is why you must carry out plenty of research first before you commit to anything.