Unlike in case of startups where everything is planned from the scratch, in a franchise business, the franchisees get to work on a predefined ready-made business platform which saves them from the struggle and hardships of starting a business from nothing and help them launch their franchise business in a very short span of time. But once the investments are made and the franchisees get bound by the contract, it can be difficult for them to reverse their decision. Prudence says it is better for an entrepreneur to thoroughly scrutinize the pros and cons of associating with a franchise brand before making any investment into it and becoming its franchisee.
Brand Evaluation – Is it the right brand to a franchise?
Of course, there are perks of franchising big brands. The bigger the brand is, the easier it gets for a franchise to attract investors, find competent staff, engage the best suppliers, attract the targeted segment of customers and all of these could place a business on the fast track. However, association with big brands is costlier, rigorous in terms of operational compliance and comes with little or no scope for negotiation. Working with off-brands can be economical and they may provide more operational autonomy and better revenue-sharing, but it may take longer for the franchisees to get their businesses rolling.
The bigger the brand is, the easier it gets for a franchise to attract investors
Some of the preliminary considerations involved in evaluating a franchise brand are listed below.
- Brand USPs
- Brand awareness, popularity, and relevance in the local conditions
- Promotional strategies and activities of the franchisor
- Existing franchisees of the brand
- Competitor brands
- Investment and costing, revenue sharing and minimum guarantee, ROI, and breakeven
- Operational model
- Ownership and control
- Terms and conditions of engagement, personal guarantee etc
Brand Marketability – Can the brand be marketed successfully?
The marketability of a franchise brand or the products/services being offered under it largely depends on two broad parameters –
- Local factors – customer demographics, the size of the market demand, targetable market share, competition, regulatory framework etc.
- Franchisors’ marketing model/approach – value proposition, pricing and promotional strategies, supply and distribution network etc.
Even a good, reputed brand will not be able to sustain itself in a new market if the local market conditions are not favorable from a business point of view. Secondly, the franchisors’ marketing model/approach must fit into the local market conditions. This is where a bit of autonomy comes in handy for the franchisees to be able to customize the franchisors’ marketing strategies to suit the local business environment.
Even a good, reputed brand will not be able to sustain itself in a new market if the local market conditions are not favorable from a business point of view
Site Requirements – Is it possible to address the franchisors’ site requirements?
Different brand franchisors have different site requirements for their franchise stores and these site requirements are explicitly mentioned. It is the responsibility of the franchise to locate suitable site options which meet these requirements and the site must also be approved by the franchisor. However, finding the right site is often a time-consuming and tiresome process and involves considerable investment especially in the backdrop of real estate space becoming scarce and expensive with every passing year. Therefore, it becomes important for a franchise to carefully study the site requirements and figure out if suitable site options are available and if they should invest in it. Some of the common site requirements are given below.
Finding the right site is often a time-consuming and tiresome process and involves considerable investment especially in the backdrop of real estate space becoming scarce and expensive with every passing year
- Site should be situated in a prominent market area, on the main street with high visibility
- Preferably ground floor and corner plots
- Parking facility
- Access for inventory vehicles
- Electricity, power backup
- Necessary space and infrastructure for servicescape needs, safe use of equipment and devices
- Necessary permissions from local authorities for building, electricity connection, trade etc.
- Minimum surface area
Operational Model – How will the operations roll out?
In franchise business systems, franchisors define the operational model or framework following which the franchisees will have to execute the business activities. This includes the value-chain route, business processes, flow of operational activities, SOPs, standards of performance and output, reporting and audit etc. The franchisees’ stores act like an extension or a branch of the franchisor’s business. Two important considerations arise at this point.
This includes the value-chain route, business processes, flow of operational activities, SOPs, standards of performance and output, reporting and audit
- Is it feasible to implement franchisor’s operational model?
- Does it suit the entrepreneurship personality of the franchise?
Following franchisor’s operational model depends on the availability of the required resources like funding, technology, and technical infrastructure, skilled and trained manpower, supply chain and logistical infrastructure, raw materials, suppliers, and vendors etc. Secondly, not every entrepreneur is cut for the franchise business. There isn’t much scope for business innovation and creativity here. Business growth and expansion remain confined to the boundaries defined by the franchisor.
Exit Options – Are the exit routes open and convenient?
Keeping their business interests in mind, most franchisors prefer to keep their options of terminating the franchise agreement wide open. But the same is not always true the other way round. It is not always convenient for a franchise to terminate a franchise agreement in the event of availability of better business opportunities, the emergence of operational difficulties in running the franchise, lack of profitability etc.
Some of the common grounds based on which a franchisor can terminate a franchise agreement are:
- Failure to pay royalties to the franchisor
- Any material breach of the contract by the franchise
- Failure to execute operations as agreed by the franchise
- Failure to comply with legal and regulatory obligations
- Franchisee going bankrupt or insolvent etc.
In the event of a franchise agreement coming to an end, the franchise is subject to the stipulations and obligations laid down in the contract. Some of the common liabilities on the part of the franchisees in the termination of the franchise agreement are:
- Payment of all outstanding dues as per the contract
- Return of all assets belonging to the franchisor
- Agree to the non-disclosure agreement (trade secrets, operational model, financial details etc.)
- Strictly refrain from using franchisor’s trade name, copyrighted materials
Thus, it is very important for the entrepreneurs/franchisees to clearly understand the terms and conditions of terminating the franchise agreement and ensure that their exit routes are fair and smooth.
In working with franchise partners, franchisors will seek to ensure that their businesses and brands continue to grow and strengthen and not take a beating because of letting someone else do business for them. It is the responsibility of the entrepreneurs, who’re interested in becoming brand franchisees to assess if they are considering the right brand for their targeted markets to steer their business interests and whether they can meet the financial, logistical and operational requirements of the franchisors
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