Top 10 Reasons Why A Franchise is Better Investment

Bygabriel

Sep 8, 2006

If the American dream is owning a house with white picket fences, you’d think that the Filipino dream is moving to the United States to be able to dream the American dream, what with the number of Filipinos leaving the country every year to take up residence in that part of the world.

Those that do decide to stay in the Philippines (or are unable to leave for one reason or another: denied a visa, waiting for a green card petition to come through, can’t live without traffic at EDSA, etc.) believe that the only way they can live their ideal life without migrating to the USA is by operating their own business. Maybe because mass media has made celebrities out of many successful entrepreneurs, or because we all know of a successful friend or relative or friend of a friend who has made it big running his own business, even those who are successful in their own professions still dream of putting up their own business.

The arrival of franchising has further made this dream of entrepreneurship much more attainable. Previously, the only way to go into business for yourself was through the hard, old-fashioned way: develop a product or service, find customers, market your business, and implement systems from scratch. With franchising, you can now buy a ready-made business.

Of course, franchising is not the only investment game in town. There’s real estate, the stock market, foreign currency, all kinds of deposits, fixed-income securities, or even derivative securities (assets whose value depend on other assets). You can even put up your own business from scratch without having to buy a franchise.

But a franchise is a much better investment than other investment vehicles for many reasons (let’s forget for one moment that I am a franchise consultant and am therefore totally biased in favor of franchising). Actually, to be completely honest about it, a franchise is not for everyone.

Reasons to invest in a Franchise over the other opportunities:

1. Business 101

Even if you earned your college degree in something as unrelated to business as Afghan Literature, chances are you may still be qualified to become a franchisee. That is because for most franchisors, the franchisee need not have previous experience in business or in the product or service sold by the franchise company. Franchisors will teach you everything you need to know about running the store. A franchise training program will usually cover areas of Marketing, Accounting, Finance, Government Relations, and probably even the rudiments of Production Management. If you skipped classes during those training days, on the job experience will take care of business training for you. Managing a franchise is a crash course in running a business.

2. Your own Boss

If you invest in a franchise, even if it’s a business selling food items from a small cart with a total sales force of one employee, being a franchisee will earn you the title of President or CEO of your company. Putting your money in real estate or in any other financial instrument, no matter how large an amount you invest, will not give you the title of CEO. More importantly, as CEO of your company, you are responsible for the overall direction and well-being of your business. Although you comply with standards of quality and service set by the franchisor, essentially, you are your own boss.

3. Instant Customers

With an established franchise name and trademark, a franchise business is guaranteed patronage of its products/services from customers who already know the brand. A start-up business will have to spend time and money in advertising, promotions and customer goodwill for its new name to be recognized. With a franchise, all you need is to set up the business, open it, and people will start coming. They are already familiar with your product, your service, your price, and the ambiance of your restaurant franchise before they even enter your establishment.

4. Resaleability of the franchise

Let’s say that your green card petition did come through and you had to pack your bags and migrate to the USA, a typical franchise agreement will allow you to sell your franchise to another franchisee or even to the franchisor himself. A franchise business can usually be resold based on the strength of the brand. If you were running your own start-up business bearing your own name, re-selling that business will be comparably more difficult. Would you be more confident buying Juan’s Chicken House or Jollibee?

5. Business Consultants at your disposal

An old saying goes, those who can, do; those who can’t, teach. Still, those who can do neither, go into consulting (I know this because I’ve been a consultant for most of my life). Part of the commitment of the franchisors to you as franchisee is to provide you assistance in a wide range of areas such as marketing, finance, sales, accounting, inventory management. The franchisor’s personnel are business consultants at your beck and call, usually minus the exorbitant hourly fees.

6. Proven Business System

If you were to put up your own business from scratch, you may end up spending many hours trying to perfect your business systems: how long should I cook the hamburgers? Which supplier offers the best terms? Is my brother-in-law qualified to do my bookkeeping, having spent three semesters mastering Basic Accounting? Sometimes, the money wasted from trial and error is enough to run your start-up business to the ground. A franchise normally offers a standardized, tested, well-thought out set of rules and procedures designed to ensure the effective, accurate and efficient operations of your business. This is detailed in the franchisor’s operations manual. A franchise takes away all the guesswork out of running a business and provides franchisees a doable, successful and teachable system to work on and adopt.

7. Pooled National Advertising and Marketing Program

The success of a franchise business relies heavily on name recognition that of making products/services a household word. A franchise system requires franchisees to pool funds for national advertising and public relations purposes. Franchisees contribute a small percentage of their sales to a marketing and advertising fund which the franchisor uses for print/radio/TV advertising, promotional materials, point of sales, and other similar collaterals needed to promote the brand and increase the overall sales performance of each franchise unit. A pooled advertising program allows franchisees to get the most bang for their advertising buck.

8. Active Investment

A franchise is usually not a passive investment. Franchisors typically require their franchisee to be involved in running the business on a day-to-day basis. It requires from franchisees a commitment to become fully involved in daily operations. Unlike real estate and time deposits, franchising allows you to work on your investment to earn more. Real estate is dependent on market value while your earnings in a franchise depends on the efforts you put into your business such as marketing, promotion, sales, etc.

9. Purchasing power

Collective purchasing power can become one of the significant advantages of buying into a franchise. Everything, from equipment to inventory, can be purchased by the franchisee from the franchisor and/or their approved suppliers at “group discount”, which is somewhat like a wholesaler’s price. In fact, for franchisees involved in a product business, collective purchasing reduces their cost of goods by 10-20% and provide them savings that often surpass the royalty fees they pay. For service oriented businesses, collective purchasing allows franchisees to get better and cheaper equipment which can help them do their business faster, more efficiently, and at less cost.

10. Greater chances for success, minimized risk of failure

As an investment alternative franchising is less risky and potentially more rewarding than many other investment vehicles. Franchising has a proven success rate of 95%. The Filipino entrepreneur has learned that instead of putting up their own business from scratch – which historically has a failure rate of 75% within a 5-year period – a better option would be to invest in a franchise, where he minimizes his risk of failure to 6%. A franchise also enjoys a better if not higher profitability compared to say, stocks or your own business start-up simply because, the business revolves around a successful and proven track record sales and operations wise — which will not likely fail.

Aside from the reasons stated above, I can think of one more reason: owning a franchise allows you to enjoy the product of your franchise business. I know many people who invested in a franchise so they can have a hot-oil treatment in the privacy of their own salon, or have a restaurant they can hold their parties in. Your stock market or t-bill investment cannot say as much. And as long as you keep these owner-related services in moderation, your franchise investment should be just fine.

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