An important aspect one should keep in mind before starting a business is the nature of the service or product you’ll offer. The process of determining it is often referred to as the ideation stage. For example, you may be interested in offering college students an academic writing service that connects them with their tutors or enables them to buy a custom essay online. The question you should ask yourself here is: What will I be primarily doing or creating? The next step is to research the market for your intended product or service. That will let you understand if it’s worth your time, and, if it is, position your business and organize your operation properly.
Many entrepreneurs ignore this crucial step and only remember about it when things start to happen in ways they never expected. It often results in wasted time, effort, and capital. If you’ve skipped the market research stage, you may be tempted to make the conclusion that starting a business is, after all, a risky endeavor. However, the scary fact that a large percentage of businesses fail within their first year of operation should make you reconsider the importance of doing market research.
By doing market research, you’ll be able to gain a more in-depth understanding of your industry. You’ll learn about the costs involved (capital requirement), market size (in terms of revenue), addressable market demographics and expected target audience. In fact, you can learn a lot more depending on how deep your research is. For example, you may be able to determine what customers care about when they interact with businesses in your target industry. Armed with the insights gained through your research you’ll be much more efficient at making business decisions.
If the numbers and facts indicate a promising opportunity, the next thing you should do is come up with a business strategy. At this stage, you should think about how you will finance your operations, create a strong brand identity, select a physical location for your enterprise, procure the necessary equipment, and hire a staff. Make no mistake about it – doing all of the above will require a lot of effort on your part and may be more difficult than you initially imagined.
Based on what they have learned from their research, many prospective business owners might realize that starting a business from scratch will be a tall order, even if there are strong indications that the chosen line is attractive (perhaps due to profit margins or the industry’s projected future growth). So what should you do? Abandon the pursuit after all the research effort you’ve put in? If you’re facing a situation like this, you likely won’t want to quit.
Fortunately, there is an alternative way following which you can get your business off the ground. It’s called franchising, and in case you’ve never heard of it before, here’s what it means. Franchising is a business model or arrangement in which a franchisee acquires a license authorizing them to use a franchisor ’s trademarks, business processes, proprietary knowledge, and other materials. In this way, they can start their own business (a franchise) and continue to develop it using their franchisor’s name. All terms of a franchising relationship are spelled out in a franchise agreement.
Typically, a franchisor is a larger enterprise with well-known brands and trademarks, a long history of operation, and a large customer base. A franchisor does not only specify the terms of a commercial relationship (e.g. an initial franchise fee to be paid, practices or standards to be upheld, and the interior design of business premises), but also provides assistance with issues concerning training, service or product development, and marketing.
In exchange for support and brand privileges, a franchisor receives some financial reward. It could be a percentage of profits or revenues or a fixed annual payment. The specifics are normally defined in an agreement. Another fairly obvious benefit for a franchisor is the possibility to expand their brand’s geographical presence without having to bear the cost of setting up and running businesses from scratch. The major advantage of the arrangement for a franchisee is the minimization of risks since they get an out-of-the-box business. Clearly, franchising can result in a win-win situation for both parties involved.
Now, let’s explore the main differences between franchise and non-franchise businesses
Brand Ownership and Control
When you choose to start a franchise, you get the benefit of using an already established brand name together with other ready processes. That helps eliminate the risks involved in building your own brand from the ground up. But with that franchise agreement comes brand dependence. Your business basically operates under the umbrella of a much bigger enterprise, even though you still own and run it. You can’t decide on your own what your logo should look like, how to communicate your company’s values to the public, what kinds of ads or promotions you should offer to the public.
By contrast, when you choose to start from scratch, you get the flexibility of making decisions about all things concerning your brand. Brand independence means you don’t have to live under the shadow of another enterprise. Additionally, you get to avoid reputational and sales risks that can hurt a franchise when a franchisor’s brand is damaged due to negative publicity (e.g. due to internal malpractices), customer service, or managerial scandals.
Costs of Starting and Operating a Business
Although the cost of starting and running a business varies by industry, choosing a franchise model may be more costly in the long run. The startup cost of a franchise can be significant. For example, it is estimated that starting a McDonald’s franchise can set one back several millions of US dollars, with a franchise fee alone costing 45 000 USD. In addition, there are annual payments to be made to the company as part of a franchising agreement.
One advantage of running a franchise of a well-known brand is that you likely won’t have to spend much money. However, depending on what the financial terms of the arrangement are, the long-term costs could end up being pretty substantial.
By contrast, when setting up an independent business, you might have to spend a little more. But you’ll surely have to spend a lot more money on marketing (promoting) your business since it’s a new brand. You bear all the operational risks, too. However, if your efforts prove to be effective, your profits in the long term can far outstrip those of a franchise operating a similar business.
You get to keep all your profits without paying royalties or other periodic franchising fees. In fact, once you’ve successfully overcome initial challenges, the rewards can be quite substantial. You could even offer your own franchising arrangement to interested/prospective business owners to increase the scale and revenue of your growing business!
To sum up, franchising has its merits and demerits. To make an informed decision about the feasibility of launching a franchise, you should understand the nature of your industry by conducting proper market research.
