How Franchising Can Help You Start A Business

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I recently heard a statistic that the failure rate for a franchise in the first 3 years of operation is just 7%, as opposed to 35% for businesses more generally. I have not been able to confirm this figure but what is factual is that the rate of business failures is much lower for businesses that are based on a franchise than for any other type of business. Well known examples of franchise operations in Ireland include Snap Printing, McDonald’s, Action Coach, and Munster Tool Company.

Broadly speaking franchising is a business method in which the franchisor (developer) grants to the franchisee (investor) the right to run a business selling a product or providing a service under the franchisor’s business format and identified by the franchisor’s trademark or brand. This includes a format for the conduct of the business, a management system for operating the business and a shared trade identity.

Franchising is a comprehensive business relationship whose four essential elements ensure a better success rate than starting a non-franchised business. These are:  (1) A legal agreement between the franchisor and franchisee; (2) An operations manual on the workings of the business written by the franchisor; (3) A training programme provided to the franchisee; and (4) On-going support from the franchisor to the franchisee during the term of the contract. In return for these elements the franchisee pays the franchisor an initial franchise fee and a continuing management services fee based on a small percentage of turnover.

The predominant types of ongoing fees are royalties (management service fee), fixed annual fees and advertising fees. These vary greatly from franchise to franchise, due to the many different business models, franchisors and agreement terms. These ongoing fees can be defined in terms of a fixed amount or a percentage of sales. A 2006 Report highlighted the following statistics as the average amounts being paid by franchisees at that time in Ireland: (1) Initial fee €24,663; (2) Initial working capital requirement €39,300; (3) Total initial investment costs €226,000; (4) Advertising levy 2.2%; and (5) Management services fee /royalty fee 6.5% Most franchisors charge a royalty based on a percentage of the gross revenue of the franchise unit. This can be either a fixed percentage, percentage range or a sliding percentage scale.

There are a number of other considerations also to be discussed when agreeing terms with a franchisor. One of these is the issue of territorial rights which can be based on a number of factors such as population, geographical area, business potential or neighbouring franchisees. A second is to check the level of training provided by the franchisor as an ongoing process, introducing the franchisee to new skills, products, methods and procedures. A third consideration is performance clauses which are the conditions and standards that must be met in the franchise agreement such as, in the case of a food retail franchise for example, food safety, hygiene, storage arrangements etc. Finally, the duration of the franchise agreement also needs to be agreed and the willingness to renew it are important if the franchisee is making a significant investment in a brand and franchise system. The franchisee needs the opportunity and the time to get a return on this investment. In Ireland the duration of agreements is generally increasing, with 54% being for five years and 35% being for ten years.

There are now a wide range of franchises available in Ireland so it may help to narrow your choice through the following key questions: (1) Does the franchise have a proven track record? (2) Does it have the four elements mentioned above? (3) Can you identify with the concept? (4) Will it work in your chosen area? (5) Do you have the necessary finances? Please remember that as in any type of business activity there are advantages and disadvantages. The advantages of franchising are that you are given a business model that has been proven to be successful and that you will be given management support by people who have a positive track record with the business already. The disadvantages are that you do not own the business name or materials and you will have to share your profits with the franchisor.

The majority of franchise opportunities come from outside of Ireland with America remaining the dominant player for franchise systems with 41% having originated there. Franchises from the UK represent 36% of Irish franchise operations, while Irish franchises represent 14%. The percentage of franchises from countries other than Ireland, America and the UK remains low at 9%. There are a wide variety of internet sites which provide detailed information on the franchise opportunities that are available in Ireland and they also provide detailed listings of items that you will need to consider when starting a business as a franchisee. These websites include: www.irishfranchisemagazine.net , www.irishfranchiseassociation.com, www.whichfranchise.ie, www.franchise-pitstop.ie,  and www.franchisedirect.ie. Further information on the hundreds of business opportunities that are available to you can be found on these websites.

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About the Author:

Professor Thomas M. Cooney (B.Comm, MBA, PhD, MMII, MCIM, FIMCA)
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