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The Options And Profitability Of Choosing A High Or Low Cost Franchise

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The Options And Profitability Of Choosing A High Or Low Cost Franchise

The Options And Profitability Of Choosing A High Or Low Cost Franchise

At many of the conferences, seminars and workshops held around the country on franchising over the years, a key element to convincing audiences of the advantages of buying into a franchise has been to get successful franchisees to talk about their journey and share their narrative on buying and running a franchise.

High-profile vs affordable franchise – its all about your budget

At one such seminar, a franchisee of a high-profile supermarket brand spoke of how her franchise brought her business and financial success. This drew admiring comments from the audience of prospective franchisees who all, I’m sure, hoped they too would be able to access such a prestigious franchise. The next speaker, also a franchisee, confessed that he too had his eye on a big retail or international fast food brand, but, alas, could not afford it so settled for a more affordable fast food franchise. His next words startled everyone when he announced….”and now I own five franchise outlets and am on my way to being a successful multi-store owner.”

“What this franchisee did was cut his cloth according to his means and chose a great entry point into franchising from which to then grow and expand,” explains Sasha-Lee de Bod, partner at Franchising Plus. “Besides mitigating his risk, the franchisee would also have low working capital requirements, lower ongoing costs and more importantly less stress!  By starting off with one affordable franchise, he learnt the ropes and was prepared to then take on more stores as his experience grew, armed with a sound financial strategy and above all with extensive operating experience.”

What makes a franchise more valuable?

“On the face of it, determining the value of a franchise brand has always been pretty simple,” says Eric Parker of Franchising Plus. “Its worth lies in the eyes of its consumers; If more people are likely to recommend your brand than not, by subtracting the percentage of detractors from the percentage of promoters, will show you the clear bias.”

But the popularity and value of brands have taken a knock these past few years and even successful brands are failing through no fault of their own. There is also the danger of buying into a successful but saturated market – with encroachment and cannibalization a real problem as franchisors blanket a city with stores on every corner and franchisees have to contend with getting a smaller share of the pie.

It is logical that when buying into a big, established brand your return on investment should be higher and the support structures fine-tuned over a long period of time and through the bench-marking of a large number of outlets. Logically, you will be expected to pay more in upfront fees, in set-ups costs and in royalties.

From a franchisors’ financial forecasts, the return on investment is higher with more stores even if their gross sales and net income is lower than if they have fewer stores. But it is a fact that fewer franchisees in a given area will generate higher gross sales as there is less same brand competition. It becomes a conundrum of franchisors wanting to maximize market share as opposed to franchisees needing to maximize their rate of return per unit.

“Those franchise brands that run ethical operations should always keep an eye of the ROI’s of both themselves and their franchisees and strike that happy balance. The value of that brand then comes down to the balance that is achieved between the franchisor’s goal in maximizing market share and franchisees’ desire and ability to run profitable units. Finding the balance between the conflicting interests of the franchisee and franchisor and working as a team for the ultimate benefit of both is the key to a successful franchise brand,” concludes Mr Parker.

Identifying the potential of a brand

A brand is identified by having a long, established history with measurable ‘brand equity’ as is the case with most major international brands. “But remember, says Sasha-Lee de Bod of Franchising Plus, “those brands had to have started somewhere, with just a handful of franchisees, building their brand one store at a time. Especially in franchising, brand value and equity is exponentially boosted by the duplication business format which allows for fast franchise growth – especially if the concept is new and filling a gap in the consumer market. This is why getting into a franchise system is so attractive and exciting on so many levels.”

The biggest and most obvious reason why buyers buy into franchise systems is their untapped potential growth and just because a brand doesn’t have a long, established history doesn’t mean it can’t or won’t develop into a major player. The correlation between buying an established brand in the millions and buying a lower entry franchise in say education or a services franchise comes down to economies of scale and in the appetite for risk. There is the financial risk of over-extending oneself in an expensive franchise concept and, on the other hand, there is the business risk of investing in a new and up-and coming concept or in a low-entry franchise that has no track record or might turn out to be a short-lived fad.

According to franchise guru Eric Parker, who has been involved with franchises for decades, there are countless cases of franchisees getting in on the ground floor of a new franchise brand and becoming very successful and wealthy. “By investing in a quality business model early, without requiring a huge financial investment, your potential earnings ceiling should grow as the franchise grows.”

Whether you choose an established high-cost brand or a low-cost start-up, owning a franchise can be a great way to start a business. The tried-and-tested formula provides a roadmap to success in the company of other like-minded franchisees – all focused on growing their businesses and achieving financial success.

To view various franchise opportunities in various sectors view our premium Franchise A-Z Directory

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