Why starting a franchise is better than starting a new business - Essay Example

Why starting a franchise is better than starting a new business The US is truly the land of opportunity. One can choose to start his or her own business from scratch or choose from among thousands of business opportunities, as well as franchises, in all fields and professions. As a matter of fact, there is a vast array of different available alternatives and opportunities such that it is often difficult to decide on the best plan to follow. After choosing the best path, one would require help starting the business, hence the need to appreciate the differences between starting a business and franchising opportunities, as well as choosing which plan is the most applicable (Bradach 99). Although franchising is similar to starting one’s own business in various aspects, these business initiatives are inherently quite dissimilar. This paper will examine the reasons why it is better to start a franchise rather than a new business. Broadly speaking, franchising refers to the means of operating a commercial operation through the use of certain elements or aspects of other businesses, for instance, its products, brand and name. Previously, this entailed licensing agreements where business operators had the right to sell certain products in certain markers, distribution deals that work on the same basis or other form of agency agreement in which one runs part of a greater business. However, today, franchising refers to the granting of licenses to trade under similar names as the parent companies and to make use of all or most of the aspects, which make these businesses successful to enable one’s venture to strive. In the modern business environment, some of the most lucrative businesses globally, for instance, McDonald’s and Domino’s Pizza restaurants, operate on the basis of a franchise. Franchises work in a rather peculiar manner. The person or business that grants the license is referred to as the franchisor while the franchisee refers to the individual or business that gets the license to run a business (Libava 57). The agreement reached between the parties means that the franchisee gets all pertinent elements of the successful franchised business, which the business needs in order to succeed. This encompasses everything from supplies, products, advertising and marketing support and branding. Such support, however, runs for the duration of the franchise agreement. The contract entails the franchisee agreeing to pay the franchisor for the privilege to use such support and business tools. In most instances, such payment is made upfront although the franchisee has to pay numerous staged payments as the business develops (Libava 81). However, it is evident that certain franchise agreements stipulate that franchisees have to make additional payments if the business grows to be exceedingly successful, but, in most cases, this amount is a regular flat rate. Although in most cases the startup cost of starting a franchise is quite large, this cost is substantially lower than the cost of starting the same business from scratch. Some of the most notable franchises include, among others, Subway, Hampton Hotels, 7-Eleven Inc, Anytime Fitness, Supercuts and McDonald’s and Pizza Hut Inc. These businesses are quite profitable and their brands are widely acclaimed all over the world. Starting such a business from scratch can cost quite a lot. However, franchising allows business owners to pay low costs in order to start these businesses. For instance, in order to start franchises such as McDonald’s, one only requires between $1.07 million and $1.89 million, to start a Subway franchise one needs between $85,200 and $260,350. On the other hand, in order to start a Hampton Hotel franchise, one must pay the franchisor between $3.7 million and $13.52 million. These figures go to show that starting a franchise is way cheaper than establishing such a massive company. Perhaps one of the most attractive aspects of franchising is the reduction of risk. The business is not essentially a new one, but rather a tried and tested venture, which has already proven successful. This means that the business owner does not have to spend excessive amounts of time informing the market of what the business since the market is already aware. However, a possible downside to franchising is that the franchisor will mostly attempt to dictate how the franchisee will run the business (Gurnick 35). Therefore, if one fancies being his or her own boss and make individual decisions on business management, the individual may have less freedom starting a franchise than starting his own business. Therefore, for the massive protection and safety provided by the trusted brand, there are numerous sacrifices one has to make. The primary tenet of a successful franchise system is that all franchises operate under one operating system and brand. This is how customers of McDonald’s are guaranteed the same products and services regardless of the location. The franchise system makes concerted efforts to guarantee that all operators do the same thing and all business units, support and reinforce the franchisor’s brand. When starting a business from scratch, there is no requirement to work under a common brand, although certain business opportunities allow others to use their brands. Additionally, because the focus of a business opportunity is setting one up for operation, very little consideration is given to the imposition of a shared operating system subsequent to the business opening (Bradach 137). One receives suggestions regarding the most effective way of running the business, but these are suggestions and not rules. In addition, franchises offer ongoing support to all business owners. Franchises encompass ongoing commitment to support franchisees over their entire business tenure. These support programs encompass structured periodic contacts characterized by dedicated support personnel for marketing, technology, staff training and all other aspects of ongoing operations (Gurnick 35). Though a business opportunity offers ongoing support, the process is often quite informal and does not center on a form of contractual commitment, but is rather driven by demand since business owners respond to requests for assistance. In most instances, businesses do not have dedicated staff that cater for consistent support needs, thus will not offer support services proactively or periodically. On the other hand, franchises entail the payment of ongoing fees. There is a contractual agreement that necessitates such payments to the franchisor in exchange for the continued use of the operating system and brand. These royalties enable the franchisor pay for the programs, as well as the dedicated staff the franchisor utilizes to provide the business with pertinent ongoing support (Libava 157). Although a business opportunity does not present the challenge of making these ongoing payments, this means that a business owner is also not able to enjoy the same level of assistance provided by a franchisor. It is evident that, while the initial, as well as ongoing fees related to starting a franchise are momentous, a viable tradeoff is that the business owner’s risks of failure are substantially low and the profit made in the long run are exceedingly high. Another notable advantage of starting a franchise rather than a business from scratch is the requirement of legal disclosures. This is one of the most notable differences between the two business opportunities. Legal restrictions associated with the sale of a business and a franchise are quite difference. These legal restrictions entail compliance with both state and federal regulations regarding disclosure requirements during the investigative phase of starting a business. In franchises, disclosure requirements are extremely stringent and are based on a document referred to as the Uniform Franchise Offering Circular (UFOC) (Libava 214). This documents consists of a wide array of information regarding the franchise, as well as the opportunity offered, such as the history of the operation and employees, any bankruptcies and litigation, all costs and fees, all restrictions and rules relevant to the business operation, as well as the audited financial records of the franchise company. Business opportunities do not require the preparation and delivery of documents such as the UFOC, though they have to fulfill state requirements concerning disclosure. Therefore, franchises present a greater level of legal information disclosure than typical business opportunities. In addition to legal disclosure advantages, franchises provide other benefits such as free staff training and development in order to enable the franchisee’s staff to attain relevant and practical business skills (Libava 79). This essentially helps ensure that the business gets off the ground rather quickly. The strongest argument for starting a franchise is brand recognition. This entails opening the business’ doors with a massive customer base from the first day, acquiring preferential pricing on supplies and equipment and having ample network of support. These are all powerful motivators to establish a franchise instead of a business from scratch. In essence, the franchisee can make use of the economies of scale, which the franchisor has already built, thereby enabling the business cut back on costs such as certification, licensure and business registration. In addition, franchising makes is quite easier to find customers than would be possible in a business started from scratch (Bradach 154). This is primarily because the quality of the brand, products and services is known, thus customers are able to trust the franchisee’s products readily. Overall, starting a franchise is better than starting a business from scratch since the hardest bits of starting a business are already done, and the chances of success are quite high. Works Cited Bradach, J. L. Franchise Organizations. New York: Harvard Business School Press, 1998. Print. Gurnick, D. Distribution Law of the United States. New York: Juris Publishing, 2011. Print. Libava, J. Become a Franchise Owner: The Start-Up Guide to Lowering Risk, Making Money, and owning what you do. New Jersey: Wiley, 2011. Print. Read More