Advantages and disadvantages of domestic and international franchising

Advantages and disadvantages of domestic and international franchising Introduction Buying a Franchise offers many benefits over starting a business on your own. The franchisees benefit from the training and ongoing support that they receive whilst trying to make their business successful. People starting a business on their own often have no help or guidance in the day to day running of the business! The franchisees receive guidance on location, fixtures and fittings, marketing and operation of the business model. This guidance is based on years of experience the franchiser has gained not only from running the business model but also from advising other franchisees. Buying a franchise business is at least a five year commitment and as such should not be taken lightly. It is important to make the right lifestyle choice rather than basing the decision to buy purely on profitability of the business model. A prospective franchisee should always look at the market trends to ascertain whether the need and requirements of the products of the franchise opportunity are predicted to grow or decline over the medium and long term. Getting advice from an experienced accountant can help in this respect. What makes the franchisers products better than the competition? Is the franchisor continually investing in improving the products to reflect changes in latest trends and requirements of the customers? Analysing which products have been changed and new ones introduced over the last five years will help in this regard. The territory is just as important as the franchise model. Not all franchises work in all territories as each area has their demographics and buying patterns. Decent knowledge of the local area is invaluable and the choice of which type of franchise business to buy should be made with regards to this information. Making the right choice of franchise that is based on individual skills as well as the individual requirements of each particular territory should serve to ensure that the business model works both in the short term and the long term International Franchising International franchising refers to a domestic businesss expansion into foreign countries and markets. International franchising is a complex process that requires thorough considerations of many factors, such as feasibility, adaptability, and benefits versus risks. Replication: During the process of international franchising, companies often strive to replicate successful domestic business models in foreign markets. Challenge: Differences in language, laws and financial systems, between franchising business and host foreign market can pose serious challenges during international expansion. Benefits: International franchising means new markets with new customers and selling potentials. International franchising also places companys name and presence in a global market. Adaptability: learning to adapt to the needs and demands of a new foreign market can attract local customers and buyers and lead to higher business success in a new country. Counsel: International franchising experts help companies understand a foreign market before expansion. Consultants advise businesses on a number of subjects, from financing to culture gaps. Advantages: There is a higher likelihood of success since a proven business formula is in place. The products, services, and business operations have already been established. Bankers usually look at successful franchise chains as having a lower risk of repayment default and are more likely to loan money based on that premise. The corporate image and brand awareness is already recognized. Consumers are generally more comfortable purchasing items they are familiar with and working with companies they know and trust. Franchise companies usually provide extensive training and support to their franchisees in effort to help them succeed. Many times products and services are advertised at a local and national level by the main franchise companies. This practice helps boost sales for all franchisees, but individual franchisees dont absorb the cost. Disadvantages: Franchises can be costly to implement. Also, many franchises charge ongoing royalties cutting into the profits of franchisees. Franchisors usually require franchisees to follow their operations manual to a tee in order to ensure consistency. This limits any creativity on the part of the franchisee. Franchisees must be very good at following directions in order to maintain the image and level of service already established. If the franchisee is not capable of running a quality business or does not have proper funding, this could curtail success. Sometimes franchisors may be lax on their commitment to support the franchisee. Also, they may make poor decisions that would have an ill effect on the franchisee. Therefore, it is important to research any franchise concept thoroughly before signing any agreements. Benefits on International Franchising Purchasing a franchise is one way for an entrepreneur to get started in business. Franchises offer a proven business model to follow as well as support in areas like financing and training. International franchises can provide the opportunity to take advantage of growing global markets, although the franchisee will need to overcome the hurdles associated with adapting to the ways of a new country. Cultural Adaptation Franchises provide the business owner with a full range of support services. This proves beneficial when it comes to adapting to the ways of a foreign country. The company can help you hire local management and workers who are familiar with the methods of doing business in the country, which can make the transition much smoother. Business Expansion If you already own an established franchise and are looking to expand, adding units in another country can provide a more profitable alternative to an already saturated market. This is particularly meaningful if you sell a product or service that is rather common in your home country. Cornering the Market You may even be fortunate enough to open a franchise in a country where there is little competition and there is a great need for your product or service. This will enable you to corner the market and possibly open several locations, establishing you as the leader in your business before the inevitable entrance of competitors occur. Change of Lifestyle Owning a franchise in another country can result in a new and exciting way of life. Franchisees from a cold climate may relish the opportunity to move to a warm, sunny locale to open a business. Some may also look forward to expanding their horizons by experiencing and assimilating into a new culture. Taking Advantage of Growth If current franchisees are experiencing slow business due to the home countrys stagnant economy, they can seek to open another unit in an area experiencing strong growth. Countries and areas exhibiting growth as of 2010 include China, Latin America and the Middle East. Advantages of international franchising Franchising is a unique form of business arrangement. The original company (called the franchisor) enters into a contract with a second business (called the franchisee) in which the original company offers the second business the right to operate under the original businesss name and the right to sell its product. The franchisor usually offers guidance and expertise to the franchisee. All of this is done for a fee, and though having a franchise isnt the same as starting a business from scratch, there are a number of advantages to the system. This is also true for international franchises. Reputation The major benefit of a franchise is that franchises reputation. If a franchise is well known for offering a certain type of product or service and a new branch of that franchise opens up locally, then people know roughly what to expect. For international franchises there are some additional issues of reputation to consider. For instance, the country of origin that the franchise comes from could be viewed as exotic, which will bring in additional business. Financing Franchises are viewed as a business plan thats already undergone a trial by fire and succeeded. Generally speaking, this makes them much easier to finance, as far as getting loans from banks is concerned. If a franchises reputation and success can be clearly shown, then the bank knows the franchisee has a much better chance of succeeding than he would if he were trying to start up a new and independent business. This is even truer for companies that are known internationally, which makes banks feel even more generous when it comes to assisting with business financing. Support Regardless of whether or not the franchisee sets up in the franchises hometown or on the other side of the world, an international franchise has the capability of extending support, advice and training to franchisees. The franchise offers training manuals, access to supply networks, advice and other forms of help to the franchisees. This is especially true where an international franchise is concerned, because every franchisee impacts the franchises reputation and reach. If all of the franchisees do well, then it will increase the franchises reputation, reach and even their brand recognition. Franchising primary benefit is risk minimization. Starting a new business is risky. Most studies show that over 90 percent fail within three years. The primary reason that the failure rate is so high is because the owners have to go through the learning curve of operating that specific type business. Franchising reduces that curve substantially. Another reason to buy a franchise is that a franchise investment can be thoroughly researched before any significant expenditure is made. Existing franchisees offer a wealth of information about the business so that new franchisees can try the business on before they buy to make sure its a good fit for them. Franchisers sell a defined, proven business format or method of operation, offering a product or service that has sold successfully. An independent business is based on both an untried idea and operation. The experience of the franchisers management team increases the potential for success. This experience is often conveyed through formal instruction and on-the-job training. Franchisees can often buy lower-cost goods and supplies through the franchiser, resulting from the group purchasing power of all the franchises. Established franchisers offer national or regional name recognition. While this may not be true with a new franchiser, the benefit of starting with one is the potential to grow as its business and name recognition grow. Franchising provides a uniform system of operation, so that consumers receive uniform quality, efficiently and cost-effectively. A uniform system brings with it the advantages of mass purchasing power, brand identification, and customer loyalty, capitalizing on the proven format. A franchiser also provides management assistance, including accounting procedures, personnel and facility management. An individual with experience in these areas may not be familiar with how to apply them in a new business. The franchiser helps a franchisee overcome this lack of experience. Franchisors help franchisees develop a business plan. Many elements of the plan are standard operating procedures established by the franchisor. The most difficult part of a new business is its start-up, since even experienced managers lack the knowledge to set up a new business. One of the biggest benefits to franchising is marketing. The franchiser can prepare and pay for the development of professional advertising campaigns. Regional or national marketing done by the franchiser benefits all franchisees. In addition, the franchiser can provide advice about how to develop effective marketing programs for a local area through a cooperative marketing fund, to which the franchisees contribute a percentage of their gross income. Its possible to receive assistance in financing a new franchise through the franchiser, who often makes arrangements with a lending institution to lend money to a franchisee. The franchisee must still accept responsibility for the loan, but the franchisers involvement usually increases the likelihood that a loan will be approved. A franchiser also provides training for the franchisee. This is especially important if the concept is complex. The best training combines classroom or one-on-one training at the franchisers facility with field training at the franchisees place of business. Finally, franchising has found a solid economic niche that caters to specialized needs. Many American consumers no longer want a muffler installed by a service station, a hamburger from a diner, a pizza from someone who wont deliver it within 30 minutes or their hair cut by a local barber. Specialists, it seems, do it better, and the franchise industry is only too willing help. Once you become a franchisee and part of a franchise organization, What are your roles and responsibilities? Financial The first function you have in your new endeavour is as an investor into your business. You will need to invest financially with an initial franchising fee, but also be prepared to pay any additional costs that might be necessary to get the business up and running such as equipment costs. Also, there will be ongoing royalty fees that you will need to be aware of. Time Secondly, you will need to be sure that you can invest an adequate amount of time in the business. Although the system is basically set up in franchising, you will still need to initially spend extra time learning how the system works. The franchisor usually offers training and continuous support, hence the ongoing royalty payments. Like anything else, once you know the ins and outs of the system, the time investment decreases somewhat. Leadership and Partnership One of the most important skills you need to possess as a franchisee is the ability to be pro-active and take initiative. You should be able to easily assume a leadership role. You need to be certain that you understand how the entire system works and not be afraid to ask the franchisor questions. It is especially important to communicate with the franchisor anything that you notice that doesnt seem right to you. After all, you are basically assuming a partnership role with the franchisor. Therefore, you should be able to work together, share ideas, and resolve issues together. You may notice something that the franchisor was not aware of since you are much closer to the business. The franchisor would probably appreciate your bringing concerns or discrepancies to the table, especially if you offer possible solutions. Communication With all of the responsibilities that the franchisee holds, communication and organizational skills are key skills to possess as a franchisee. As mentioned, it is important to keep in close communication with your franchisor. In addition, you will need to be able to communicate effectively with your customers, employees, vendors, and other business contacts. Furthermore, it can be quite beneficial to team up with other franchisees on a regular basis. It can help you run your business more smoothly if you share ideas and solutions to problems experienced with others in the same capacity. Organization In your role as franchisee, you should be prepared to wear many hats. In operating the business, you will most likely have to manage all the daily operations involved in operating a business, including ordering supplies, meeting with customers and vendors, preparing payroll, resolving discrepancies, etc. These are just a few of your sub-roles depending on the type of business you are running. It is essential to be able to organize all of your responsibilities so that everything gets done accurately and in a timely manner. In conclusion, as long as you understand your role as a franchisee and make every effort to carry it out thoroughly, you should be able to manage a successful franchise.