Know about the five assessment tools & franchise models before making an investment
Starting up a new business has gained importance in these times, where people have lost jobs and are looking for stability. There are three ways to start your own business. One is to start an entirely new business. Two, buy an existing business. And third is the tried and tested model that is franchising.
Franchising is an investor centric model that is stable in nature. It is a responsible business option. It has been seen in history that franchising has flourished, especially during difficult times including the present scenario. Franchising is gaining popularity mainly because of its safety and stability.
Assessment of Franchising
There are five assessment tools to consider when taking up a business opportunity. Assessing these tools can give you an idea of whether or not to move ahead with the investment option.
It comprises an assessment of the entrepreneur mindset, financial goals, capital, time involvement, and a backup plan.
- Entrepreneur mindset: This involves creating a balance between life goals and business goals. There are two types of decisions, including fear-based or growth-based. It is advisable to take growth-based decisions because they are long term as compared to fear-based that is short term in nature.
- Financial goals: Three fundamental goals under this are safety, income, and growth. Major financial goals are concerning reward and return. Put your timelines to set these goals.
- Capital: This is the asset and liability check. No loan is recommended currently because the cost of capital becomes high and difficult to recover.
- Time involvement: Franchising requires a good time and effort, without which it does not flourish.
- Your fall back plan: It is good to diversify your business, but one must always have a fall back up plan in case of difficulty.
Understanding the industry depends on 3 factors, including understanding the underlying forces, attractivness, and critical factors determining the industry. The various elements to check are:
- Opportunity size: How big the opportunity is? Whether it is overcrowded? Is it commoditized? Is there any new product advantage?
- Growth prospects: Growth is the future fit of the business. The future growth has to be looked for as the business investment is long term.
- Demand and supply gap: What is the nature of demand and supply in the industry?
- Innovation: Innovation has gained popularity. Any new product or process can be copied, hence, innovation has to be an ongoing process. Producing distinctive products or services are required.
Each market is unique and requires a clear assessment.
- Demographic and market segmentation: Understand the market division and demographics.
- Need gap: What is the need of the market you wish to enter.
- Target group and consumer behavior: Which is the target group and how does the consumer behaves in terms of the store, product, environment, or service.
- Regulation: It is very necessary to keep in mind the regulations of a particular market segment and work accordingly
- Location, real estate, and rental: These aspects are important in relation to feasibility.
Peer to peer assessment
Assessing the competition is also important.
- Competitive advantage: Does your brand have a competitive advantage that compels the consumer to move from their existing brand to yours?
- Brand penetration and performance: How influential is the brand?
- Barrier to entry: Are there any regulations to entry?
- Product offering and differentiation
-Credibility, legacy, and brand commitment: The credibility brings in the customer.
- Standardization and sustainability: If a company has all franchises standardized means the processes are working correctly. Sustainability means are there recurring revenues?
- Operating cost and re-investment: There is a certain amount of operating cost. All businesses need re-investment as renovation or maintenance.
- Margin and return on investment: How is the company assuring to maintain or to improve the margins?
- Legal agreement and conflict resolution: Advice from a financial consultant is a must. It has to be made sure that the agreement is right.
- Training and marketing support
- Risk hedging: Assess how to reduce risks.
Types of business franchise models
After the assessment, one also has to decide on the franchising model. There are various types of franchising based on different categories.
It is divided into 2 categories:
- Product-based: This kind has a nominal or no franchise fee. The company here makes money on supply chain.
- Service-based: This kind of franchising has a large upfront fee since service is rendered and consumed locally. There is a royalty charged somewhere from 2% to 25% depending on the kind of industry.
- Unit franchise: One unit exclusivity is about 3 to 4 km. In some industries, it might not be exclusive.
- Multi-unit franchising: Multiple franchises are given to one particular person.
- Area franchise: Here one area is given to a single person. The area is divided city wise. It also comprises sub franchising rights.
- Master franchise: In this, the country to country rights are given to the franchisee. Very long term commitments are required and hence it is a legacy business.
Categorization on the basis of ownership
FOFO- Franchise Owned and Franchise Operated
This is the most popular form of franchising. There is a lot of time and effort given by the franchisee in this model and hence the entire margin is transferred to it. The time involved in such franchises is critical. Here, the franchises can be unit franchise or multiunit, or even area franchise.
FOCO- Franchise Owned Company Operated
This is where the company operates the franchise and the franchisee owns it. There are several reasons why a company would want to operate. One of the reasons is if the company is new and entering a new market, it needs to take the day to day operations. The other reasons are when the company thinks you are not equipped to operate their business and there is complexity in the business, like in large hotels and hospitals. Another reason for company operation might be international companies entering the country. They have agreements that do not allow them to run as per their choice.
FICO- Franchise Invested Company Operated
This is similar to FOCO where the company operates the franchise. The franchisee only invests and gets a return on investment from margin. The margin goes to the company who operates and gives their time. These kinds of models only fit the large companies with complex business models.
While opting for FICO and FOCO, one always has to understand why would a company have an advantage over you to run that business in your region?
COFO- Company Owned Franchise Operated
Typically, the company invests and the franchisee gives its time and effort. The margins are split into two. The company gets revenue for investment and the franchisee gets income for the time involvement.
BOT- Built Operate Transfer
Company-operated stores are transferred to a franchisee. It is done by companies who want to bring cash to the business. This is done when a company runs stores for a long period of time and now wants to transfer them to a franchisee so as to increase efficiency. The investor has a ready business to run. The gestation period is also less.
Other types of franchising
- Conversion Franchise: Converting running stores into a brand is conversion franchising.
- Job Franchise: Getting an entrepreneur or a manager to take up your franchising.
- Turnkey Franchise: The company here builds, operates, and transfers it to the franchisee.
In India the franchise Industry is a large one that contributes about 2% of the GDP. It has about 7400 domestic brand franchises and 650 international brands. Therefore, there are over 8000 brands available for franchising. Nevertheless, franchising is a great business investment opportunity.
Edited By: Vaishnavi Gupta