Progressive Franchising: Elements That Determine a Good Franchise Opportunity from a Franchisees Viewpoint - Coursework Example

Progressive Franchising: Elements That Determine a Good Franchise Opportunity from a Franchisee’s Viewpoint

Franchising has been defined as a technique though which a business expands and distributes services and goods through a licensing agreement (Justis & Judd, 2002). It normally revolves around two primary entities: the franchisor and the franchisee (Justis & Judd, 2002). The term ‘franchisor’ refers to the individual or firm that gives a third party the license to undertake business under his/her trademark or trade name (Treece, 1968). The franchisee, on the other hand, is the individual or firm that is bestowed upon the license by the franchisor to transact business under the franchisor’s trademark (Sherman, 2004). In this type of agreement, the franchisor is at liberty to dictate the kind of goods and services that will be sold by the franchisee.

There exist two main varieties of franchising agreements. They include Business Format Franchising and Traditional Franchising (Cavusgil et al., 2014). Business Format Franchising entails the provision of not only the goods, services, and trade name but also the franchisor’s entire mechanisms of operation. The franchisee is granted an advertising policy, instructions of operation, support in growth, assistance in the selection of a proper site, staff training, quality assurance, and general business advice by the franchisor. This brand of franchising is mostly found in the automotive industry, fast food restaurants, Real estate, etc. (Cavusgil et al., 2014).

Traditional franchising, also referred to as Product Distribution Franchising, on the other hand, places more emphasis on the manufactured goods and services than the franchisor’s primary business set-up (Justis & Judd, 2002). This type of franchising is depicted in the following industries: The oil/fuel and bottling industries, amongst others.

Franchising can also be further classified into five primary categories which are (Webber, 2012): Retail franchise (success is dependent on the location of the retail premises), management franchise (office based and requires the franchisor’s skills in management), manual and executive single operator franchises (franchisee is under the direct employment of the franchise), and investment franchise (for franchisees with large reservoirs of investment capital). In summary, the franchisee must go through four stages in the quest to establish a sustainable and profitable enterprise. They are represented in the following diagrams (Webber, 2012):

Of particular interest is the fact that the concept of franchising is pegged on the following cornerstones: Brands, Relationships, Systems and Support. In the following paper, I shall seek to expound on the elements that combine to create a great franchising opportunity.

Identification of the Perfect Franchising Opportunity

Launching a franchise is just like launching any other investment or business venture; it is a risky affair (Martin, 1988), especially for the one seeking to purchase the franchising license (Sherman, 2004). However, before acquiring the license for a seemingly perfect franchise opportunity, one is required to do the following: Evaluate one’s reasons for desiring business ownership, implications that the franchise might have on one’s income and lifestyle, go through a substantial amount of literature on franchise relationships, narrow down one’s focus to a specific system and start process of application after ensuring that one’s borrowing capacity is sufficient (Webber, 2012). The individual is also entitled to the receipt of all disclosure material, as well as advice from advocates and accountants who are well versed in matters regarding franchising. Once all this has been undertaken, a period, during which one would reflect on the information acquired and decide whether or not to proceed, would suffice.

The individual seeking to make this purchase, called the franchisee, is also obliged to acquire a comprehensive understanding of the existing elements that would combine to make a franchise opportunity with the potential for exponential growth and expansion. These factors are discussed as follows:

Demand

The franchisee ought to put into consideration the presence, or lack thereof, of demand, that is, the customer’s demand for the goods and services provided by the franchisor. For a successful franchise, this demand has to be high and consistent. There should also be a high likelihood of a constant demand for the goods and services even after the season when these products were needed the most has long passed. The individual should also ensure that the products that they and the franchisor are dealing in are not fad items as this would culminate in the creation of temporary demand. He should aim at supplying a good or service that is so good and customer-oriented that it creates recurrent business (Sorenson & Sørensen, 2001).

The franchisee should also ensure that alterations in yearly business income, in the supply of outward-bound yields every four weeks, should not influence what the public needs or what they ought they ought to afford. This, he can achieve, by being prepared to continually look for ways to make a positive contribution to the lives of the clients in the industry he or she intends to venture into.

Competition

The franchisee should also engage in the determination of the level of competition in the geographical area one wishes to venture into. This, he or she will do, through finding out the exact figure of “franchised and company-owned” stores in that specific area, as well as the number of companies dealing in the same goods and services. In addition, one ought to ask oneself if the rival organizations are well established and recognized by the wider community that they serve (Sorenson & Sørensen, 2001).

It is recommended that the individual also undertakes extensive research with regard to the prices at which they sell their goods and services. Are the prices equal to, higher or lower than the franchisee’s intended price? As with every other business, one ought to ask oneself if one might be willing to lower one’s price and the short-term, as well as long-term implications that this will have on the success of the eventual venture.

Personal Capacity and Ability

The franchisee must, in addition, undertake a thorough assessment of his/her own ability to successfully run the franchise. Experts in business quarters claim that the ultimate franchisee ought to possess the following traits: result-oriented, imaginative, positivity regardless of circumstances, flexibility, multitasking, critical and creative thinking, energetic, self-confidence, and a yearning to learn (Webber, 2012). Others include: one’s ability to interact with people on a personal level, and consistency (Justis & Judd, 2002).

The Franchisor (and The Franchise’s Reputation)

It is also highly recommended that the franchisee makes sure that the franchisor, as well as his/her franchise offering, has been approved of by the State Registration Board, and has been deemed for has been deemed safe for investment (Webber, 2012. Note that well-established enterprises tend to possess extra revenue streams which may include commissions from suppliers, mark-up on product lines (Webber, 2012).

Customer feedback is also another crucial element regarding the franchise’s reputation that the franchisee ought to examine. Indeed, it would be rather risky if the person were to associate oneself with a franchise against which numerous lawsuits have been filed by disgruntled clients, with a negative outcome of judicial defeat. The state and quality of the pre-existing franchisor-franchisee relationships should also play a significant role in the determination of one’s willingness to partner with the franchise (Webber, 2012). Moreover, in a scenario whereby the franchise of interest is an emergent brand, one must engage in serious evaluation of the company’s projected progress and expansion. This insight should be preferably drawn from external, neutral and credible sources. A good example might be an independent Actuarial report on the company.

The Level of Risk

The extent of one’s exposure to risk when making a purchase into a franchise is primarily determine by the duration over which the franchise has been in existence, as well as the level of skill that the franchisor possesses. In accordance with this criteria, an enterprise can be placed under the following categories (Webber, 2012):

Phase

Description

No. of Franchises

Level of Risk

Immature

Growth

Maturing

Franchisor has already spent a lot of money and is looking for ways to create a stream of revenue. He/she is also not conversant with recruiting franchisees

Organizational structure appears to be stable

Franchisor engaged in getting failing franchises to sustainability which is a time consuming and psychologically draining process

Formulation of plans for substantial growth

Franchisor reflects upon whether his/her strategy is being executed seamlessly

Receipt of appraisal from associated franchisees

1-10

11-50

51-99

High

Low

Seniority

Franchisor is in possession of resources sufficient for the support of the network

Has the capacity to respond effectively to market changes

Franchisee selection is more rigorous

100+

Proven Format

As a franchisee, one must also be able to gauge the success of a franchise opportunity through putting into careful consideration, the degree of triumph of a pilot study launched by a franchisor to test the market. This is crucial, especially in a case whereby the idea of a franchise was conceived from an already-existing company with company-owned outlets. Despite the fact that the company might have been initially consistent in its revenues and practices prior to conversion, things are definitely bound to undergo drastic changes in the event that the company is fully converted to a franchise (Stanworth et al., 2004).

The negative effects that can arise from these changes are usually mitigated by pilot studies deployed by the franchisor with the primary goal of determining how successful a mirror-project would be in different catchment zones of varying scopes, worker recruitment policies, localities, as well as general characteristics of the populations residing in those areas. A pilot study has to be just as successful in practice as it was in theory before a franchisee can deem the franchise worthy of a fruitful franchising relationship (Sivakumar & Schoormans, 2011).

Ease of Duplication

This is a crucial factor, especially because it determines the maximum number of franchises that one can set up in order to effectively serve one’s potential customer-base. The lack of ease of franchise duplication consequently puts a limit on the number of sites that would be suitable for one’s business venture (Sivakumar & Schoormans, 2011). It might also result in the emergence of peculiar conditions such as the constant flow of a particularly resource that is rare in that particular area. Such issues culminate in one’s inability as a franchisee to establish a ‘branch’ just about anywhere one pleases.

The emergent problems, which will be mostly of the logistical variety, will necessitate the employment of individuals with special skills normally possesses by a privileged few. These skills are usually the result of thorough artistic training, or rather the fine-tuning of one’s ability to be a creative thinker

Financial Matters

The individual ought to put into consideration the total amount of money it is going to cost for him/her to set up a franchise with a particular firm (Webber, 2012). For a franchisee, investing in a franchise comes at a high cost, a cost that is charged by the owner of the franchise (franchisor) for the use of the franchise’s trademark (Treece, 1968), systems of operation, as well as what experts would term as “intellectual property.” In light of this fact, one should put into consideration fees that will be incurred such as royalty fees. However, this policy varies from franchise to franchise as many establishments charge a percentage on one’s profits instead of demanding royalties. Furthermore, some franchisors have a tendency of introducing new and unreasonable charges more often than not, which weighs down the franchisee in the long run (Martin, 1988).

Furthermore, the venture should show reasonable promise with regard to its ability to make sufficient profit for the franchisee which can allow him to live a decent comfortable life and also enable him to pay back the debts he accrued while he was launching the business (Stanworth et al., 2004). It is recommended that he even earns some money on top which he can re-channel into the development of the franchise. It is of importance to take note of the fact that franchising is never the solution for a business making small profit margins. It is just a means through which one can build upon one’s prior financial successes (Stanworth et al., 2004).

Operational Matters (Franchising Culture)

Indeed none of that which has been discussed above matters if the franchisee fails to establish a cordial and professional relationship with the franchisor, which would culminate in the creation of a business partnership pegged on the following cornerstones: trust, mutual respect, and support (Sivakumar & Schoormans, 2011).

As a franchisee, one is obliged to gain a comprehensive understanding of the unique franchisor-franchisee relationship. The various aspects of this relationship that need to be comprehended include: the time-scales involved, the presence, or lack thereof, of an approved launch party, the roles played by the involved parties with regard to provision, training and payment of staff, national and regional marketing, provision of point-of-sale material, frequency and cost of refurbishment, as well as the purchase, or rather ownership of equipment needed by the franchisee (Webber, 2012). There is really no alternative since for one, the franchisee is choosing to believe in the promises conveyed by the franchise owner and his employees. This trust gained is that which compels one to pledge one’s entire capital (financial assets) to the franchise’s cause in the pursuit of possibly rewarding opportunities.

Emotional Turbulence

There exist several stages through a franchisee must go through before gaining full competency and becoming a fully-fledged entity in the franchisor-franchisee relationship. Overcoming these hurdle might be effortless to some, but to others, it might prove to be a challenge, a challenge that would culminate in feelings of frustration, despair self-blame (Webber, 2012). This psychological sojourn, which lasts for around 3-24 months, is depicted in the following diagram:

Conclusion

When one takes up the role of a franchisee, finding the right franchise opportunity is indeed essential if one is to experience the joys of successful business ownership. However, there exist several crucial elements that together, grant viability to a franchise opportunity. These elements include demand (Sivakumar & Schoormans, 2011), competition, personal skills, the franchisor and the franchise’s reputation, maturity phase of the franchise (Webber, 2012), proven format, ease of duplication, costs and, as well as emotional implications (Webber, 2012). In the execution of this research, it was also discovered that these particular elements are subjected to variations from franchisee to franchisee, especially due to personality differences, level of exposure, financial might, amongst other factors.