Business

Franchises — an alternative route to self-employment

by SHARON DONALDSON

Wednesday, January 10, 2018

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Franchises are a lucrative way of running your own business, but not necessarily from scratch. For financial professionals, buying into an accounting franchise can be a profitable option.

Becoming a franchisee ultimately promises a much easier route to success, as it allows someone to set up their own business without starting completely from scratch. They use a tried and tested formula, and benefit from the experience and support of the franchisor (the company offering the franchise).

Franchises can be local or international entities, and there are quite a few advantages to starting up a local franchise. A local franchise can be considered low-hanging fruit with significant advantages including:

•Established/settled brand loyalty due to cultural acceptance

•Easier/cheaper compliance with franchise requirements

•Better management of the relationship between the franchisee and franchisor due to proximity

•May be easier to get financing as the brand has such significant value that is well known and accepted

Cultural influence could make establishing a local franchise much easier given that there is shared view of the cultural influence on the market acceptance of a product which would be absent with the international franchisor and would have to be earned over a period of time.

On the whole, successful franchisees can enjoy some of the benefits of self-employment with less risk. Good franchise operations have a much lower failure rate than completely new businesses and can provide a good living, provided that the franchisee avoids the pitfalls.

A franchise is usually based on a proven business idea. A good franchisor will continuously research and update the business idea. This means that you may be able to exploit a recognised brand name, making it easier to sell to customers who are familiar with the name, while also being able to use any trade marks the franchisor owns.

A good franchise operation will give you full support. Typically, this includes introductory training, usually covering general skills as well as training; help in setting up the business; a detailed operations manual that tells you how to run the business and ongoing support and advice.

In taking on a franchise you will usually have exclusive rights in your territory and you will almost always be given exclusive rights to the franchise in a specified region or to an exclusive client base. However, you need to note that there will still be competition from other businesses.

Financing a franchise is likely to be more straightforward. It can be easier to borrow money to invest in a franchise with a good reputation than to find backing for an unproven start-up. Indeed, some franchisors have relationships with banks and can help you borrow money, and local enterprise initiatives may supply start-up finance.

But there are some disadvantages. You will have to pay an initial franchise fee to buy into the franchise, and you also have to cover the usual business costs (premises and equipment, stock and other supplies). In many cases, these will be bought from the franchisor.

Furthermore, you pay a continuing royalty on sales, or a management fee, regardless of whether you are making a profit or not. This can be a fixed amount or a percentage of sales or a mixture of both. On top of all of this, there may be some extra costs that may be charged separately, for example, a contribution towards the franchisor's advertising costs or fees for the training you receive.

As a prospective franchisee, you need to be happy that the franchisor's services will justify all these costs, which will continue even after you have learnt the business.

In buying into a franchise you have to agree to operate within certain restrictions. Some disappointed franchisees will sometimes comment that the relationship is not as far from that of being an employee as they had hoped.

Additionally, your relationship with the franchisor means you are exposed to certain risks that are outside your control. This includes the risk of the franchisor failing to fulfil its obligations (such as providing support in the form of brand advertising or training), the franchisor going out of business, or the franchisor being sold to a new owner who changes the operation or is simply more difficult to deal with. Moreover, without the opportunity to create and manage their own brand, franchisees risk being tarnished by the failures of franchisors and fellow franchisees alike.

Finance professionals will need to evaluate whether now is a good time to start their own practice by buying into a franchise. Or if you already own a business, should you be thinking about expanding it and becoming a franchisor? The Caribbean remains a great option for either.

Sharon Donaldson is the managing director of General Accident Insurance Company.

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