ANY investment option comes with some amount of risk, though the nature and magnitude varies. However, many investors agree on one factor that of starting some business venture having good returns. This brings us to the most intriguing question, whether franchising is a lucrative option.
Before answering this question, it is important to understand the investor, his background and a proper assessment of his needs. Investors can be classified into the following broad categories:
- A person who has an existing business and is still willing to diversify: Such an investor has huge capital and an existing business, but wants to move into some other business. Some of his traits are:
- He has sound knowledge of international brands and their global value/ presence, especially the F & B brands
- Huge investment appetite, but less time to run a franchise
- Complex decision making process due to involvement of a board of directors
- Proficiency in negotiation and deal making
- A person who has a job in a reputed company and is planning for smooth returns after retirement. Investor traits in this category are:
- Has limited capital and needs expert advice to mitigate risks before investing in franchise business
- Knows about many brands, located in the most visited and popular shopping areas
- Decision making is not complex, but usually the investment horizon is high
- Sometimes he puts forth impractical negotiation terms, making it difficult to garner franchisor support in the business
- A person who has an existing property but it remains vacant. It is a loss of monthly rent for the owner which is an ongoing loss. The solution could be running a franchise at the location. But an experienced consultant should be hired who can advise about the right brand for taking the franchise. Following are some of the investor traits in this category:
- Reluctance of any property owner to invest initial capital to start a business
- Lack of experience in running business or is involved in another parallel business, so cannot devote much time to each business
- Challenge in decision making, as the owner is usually more interested in leasing compared to franchising
- Attachment of the property owner with the property leading to demand of high rentals. This more often than not is fatal for the deal. A few of them also ask for a minimum guarantee which ultimately becomes damaging for the long term business.
After the above, the investor must check the following before taking the franchise:
Credibility: A brand is a crowd puller. Also the management team running the brand adds to its credibility.
Successful business prototype: A brand that already has several outlets or is into franchising is ready for replication which makes the franchisee's life easier. For instance, food cost is an important component in a Profit & Loss statement of any F&B business and can affect the profit margin.
Uniqueness of the concept: Research based outcome that gives differentiation will prove to be relevant for the target group in a given geography.
High ROI: It depends on several factors like industry, concept, location, brand awareness, competition, management bandwidth of a franchisee, franchisor support, etc. The following questions need to be answered to establish the right ROI:
- Do I have the target group and expect high footfall in the location where I am opening the franchise?
- What is the competition that exists in the given location?
- What kind of business volume is expected on a monthly basis?
- What is the propensity of the target group to spend on the given product/service category?
- Is the business sustainable in the long term?
Legal agreement: In franchising an agreement should be enforced between the parties after consultation with a franchise lawyer. A few important clauses like Exclusivity, Exit clause, Indemnity, Intellectual Property, Territory rights, etc., should be checked.
An investor can surely multiply his profits through franchising, provided the above pointers are borne in mind before selecting a franchise.
Shashwat Prakash, Senior Consultant-Strategy