The Pathways to New Ventures for Entrepreneurs
Every prospective entrepreneur wants to know the best methods for entering business. In other words, what are the ideal pathways to starting a venture for oneself? In this chapter, we examine the three most common methods: creating a new venture, acquiring an existing venture, or obtaining a franchise. Each pathway has its own particular advantages and dis- advantages. In addition, each method has a variety of issues that need to be understood by the entrepreneur. It is always unwise for an entrepreneur to rush into a decision for a venture without the proper understanding of the particular form of entry. This chapter is devoted to outlining some of the particular issues related to each form.
Franchising
Any arrangement in which the
owner of a trademark, trade name, or copyright has licensed others to use it in
selling goods or services.
Franchisee
A purchaser of a franchise
Franchisor
The seller of the franchiseHow a Franchise Works
Business franchise systems for goods and services generally work the same way. The franchi- see, an independent businessperson, contracts for a complete business package. This usually requires the individual to do one or more of the following:
1. Make a financial investment in the operation 2. Obtain and maintain a standardized inventory and/or equipment package usually pur-
chased from the franchisor 3. Maintain a specified quality of performance 4. Follow a franchise fee as well as a percentage of the gross revenues 5. Engage in a continuing business relationship
In turn, the franchisor provides the following types of benefits and assistance:
1. The company name. For example, if someone bought a Burger King franchise, this would provide the business with drawing power. A well-known name, such as Burger King, ensures higher sales than an unknown name, such as Ralph’s Big Burgers.
2. Identifying symbols, logos, designs, and facilities. For example, all McDonald’s units have the same identifying golden arches on the premises. Likewise, the facilities are similar inside.
3. Professional management training for each independent unit’s staff.
4. Sale of specific merchandise necessary for the unit’s operation at wholesale prices. Usually provided is all of the equipment to run the operation and the food or materi- als needed for the final product.
5. Financial assistance, if needed, to help the unit in any way possible.
6. Continuing aid and guidance to ensure that everything is done in accordance.
Advantages of Franchising
A number of advantages are associated with franchising. In the following section, we describe four of the most well-known advantages: training and guidance, brand-name appeal, a proven track record, and financial assistance.
TRAINING AND GUIDANCE
Perhaps the greatest advantage of buying a franchise, as compared to starting a new business or buying an existing one, is that the franchisor usually will provide both training and guid- ance to the franchisee. As a result, the likelihood of success is much greater for national
BRAND-NAME APPEAL
An individual who buys a well-known national franchise, especially a big-name one, has a good chance to succeed. The franchisor’s name is a drawing card for the establishment. People are often more aware of the product or service offered by a national franchise and prefer it to those offered by lesser-known outlets.
A PROVEN TRACK RECORD
Another benefit of buying a franchise is that the franchisor has already proved that the operation can be successful. Of course, if someone is the first individual to buy a franchise, this is not the case. However, if the organization has been around for five to ten years and has 50 or more units, it should not be difficult to see how successful the operations have been. If all of the units are still in operation and the owners report they are doing well finan- cially, one can be certain the franchisor has proved that the layout and location of the store, the pricing policy, the quality of the goods or service, and the overall management system are successful.
FINANCIAL ASSISTANCE
Another reason a franchise can be a good investment is that the franchisor may be able to help the new owner secure the financial assistance needed to run the operation. In fact, some franchisors have personally helped the franchisee get started by lending money and not requiring any repayment until the operation is running smoothly. In short, buying a franchise is often an ideal way to ensure assistance from the financial community.
advantages of Franchising
The prospective franchisee must weigh the advantages of franchising against the accompany- ing disadvantages. Some of the most important drawbacks are franchise fees, the control exercised by the franchisor, and unfulfilled promises by some franchisors. The following sec- tions examine each of these disadvantages.
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Franchising: The Hybrid 149
FRANCHISE FEES
In business, no one gets something for nothing. The larger and more successful the franchi- sor, the greater the franchise fee. For a franchise from a national chain, it is not uncommon for a buyer to be faced with a fee of $5,000 to $100,000. Smaller franchisors or those who have not had great success charge less. Nevertheless, entrepreneurs deciding whether or not to take the franchise route into small business should weigh the fee against the return they could get putting the money into another type of business. Also, remember that this fee cov- ers only the benefits discussed in the previous section. The prospective franchisee also must pay to build the unit and stock it, although the franchisor may provide assistance in securing a bank loan. Additionally, a fee is usually tied to gross sales. The franchise buyer typically pays an initial franchise fee, spends his or her own money to build a store, buys the equip- ment and inventory, and then pays a continuing royalty based on sales (usually between 5 and 12 percent). Most franchisors require buyers to have 25 to 50 percent of the initial costs in cash. The rest can be borrowed—in some cases, from the franchising organization itself.10 Table 6.4 presents a list of the costs involved in buying a franchise.
Disadvantages of Franchising
The prospective franchisee must weigh the advantages of franchising against the accompany- ing disadvantages. Some of the most important drawbacks are franchise fees, the control exercised by the franchisor, and unfulfilled promises by some franchisors. The following sec- tions examine each of these disadvantages.
FRANCHISE FEES
In business, no one gets something for nothing. The larger and more successful the franchi- sor, the greater the franchise fee. For a franchise from a national chain, it is not uncommon for a buyer to be faced with a fee of $5,000 to $100,000. Smaller franchisors or those who have not had great success charge less. Nevertheless, entrepreneurs deciding whether or not to take the franchise route into small business should weigh the fee against the return they could get putting the money into another type of business. Also, remember that this fee cov- ers only the benefits discussed in the previous section. The prospective franchisee also must pay to build the unit and stock it, although the franchisor may provide assistance in securing a bank loan. Additionally, a fee is usually tied to gross sales. The franchise buyer typically pays an initial franchise fee, spends his or her own money to build a store, buys the equip- ment and inventory, and then pays a continuing royalty based on sales (usually between 5 and 12 percent). Most franchisors require buyers to have 25 to 50 percent of the initial costs in cash. The rest can be borrowed—in some cases, from the franchising organization itself.10 Table 6.4 presents a list of the costs involved in buying a franchise.
FRANCHISOR CONTROL
In a large corporation, the company controls the employee’s activities. If an individual has a personal business, he or she controls his or her own activities.
EXAMPLES OF FRANCHISE
. 7-Eleven Inc.
2. Subway
3. Dunkin’ Donuts
4. Pizza Hut
5. McDonald’s
6. Sonic Drive-In Restaurants
7. KFC Corp.
8. InterContinental Hotels
9. Domino’s Pizza LLC
10. RE/MAX
RE/MAX
PIZZA HUT
KFC
MC DONALDS
SUB WAY
DUNKIN DONUTS
7-ELEVEN INC
