BE YOUR OWN BOSSA FRANCHISEES

PERSPECTIVE

Franchisee is a businessman, who owns and runs his own business. It is he who choose the route of buying a franchise outlet to be an entrepreneur. It should be clearly understood that by buying a franchise of an established chain a person is not buying himself a job of managing a retail outlet. People buy a franchise when they are not fully satisfied by their existing situation be it their job. They are confident that they can successfully manage a business of their own. It is important for a franchisee to study the franchise system, various franchise options available, their cost and benefits and match the same with its strengths and weaknesses and thus choose the right one for him/herself.

THE FRANCHISEES PERSPECTIVE:The Franchisee offers a less risky route to entrepreneurship. Since franchise is a readymade business available to entrepreneurship, it is An attractive proposition as compared to setting up a green field from start. The Franchisee gets a semi-established business from day one. The Franchisor provides the franchisee all the assistance in starting and establishing the business. By buying into a franchise of a well-established profitable network, an enterpreneur increases his chances of success in the business. This is primarily because he would be dealing in the established product/services, he gets the benefits of the franchisors experience in the same business format and system to follow.

Like all other things, the franchise also has some disadvantages as a franchisee lacks independence, individual identity and has continuous obligations that may be difficult to follow. Franchise is becoming increasingly popular as it is regarded as a promise of instant success and is considered the least risky way to become an entrepreneur. At times, the franchising business may prove to be risky also. When a large franchise business is winded up, the effects on the rest of the network can be crippling. A few years ago an apparel company Stencil had to close shops. Well over 100 franchisees found them out of business overnight and also lost their investment.

In USA, there is a law that protects the franchisee but in India there is no law to regulate franchising business; hence the buyers of a franchisee business has to be extra careful while selecting a particular Franchisor business.

COSTS OF FRANCHISHING:-

If the franchising had only the benefits; all the business will go the Franchising route, yet we see a large number of independent business. Why?. The reason is that franchising involves certain cost especially from the prospective of the franchisee. These cost are bothfinancial & non-financial. The financial cost are categorized as sunk/fixed cost & recurring cost. FINANCIAL COST:A) SUNK COSTS:- The amount spent on time on buying a franchise and opening an outlet constitute the start of cost. It is the fund which is permanently locked up in franchise business. Thus it is often known as sunk cost.

Fixed Investment in opening a franchise:Like any other business, the franchise has to incur a fixed cost in opening the franchise outlet. These include:a) b) c) d) Lease Deposit with Landlord. Modification of external faade & investment in civil work. Furniture & Fixtures. Initial establishment Expenditure.

Payment of Franchise Fees:This is additional sunk cost to be borne by the franchisee as compared to those starting their independent business. The franchisee has to make an upfront fees which may or may not be refundable. This amount ranges to lacs of rupees depending upon the franchor model & earning capacity/ ROI.

Initial Promotional expenses:In addition the franchisee is often required to incur extra expenditure including advertisement and public relation expenses at the time of the Inauguration of the franchise outlet. Most of the Franchisee insists on grand Opening ceremony so as to catch the eyes of the public at large. For example In todays time lot of Jewelers franchisee call film starts at the opening of their business along with media people to highlight their store. These cost adds up to initial sunk cost as they are not recoverable. Margin for Working Capital. A part of the funds required for meeting day to day expenses get permanently Locked in the business. Generally an enterprises arranges a working capital loan from a bank to meet its day to day needs of the funds for buying supplies, supporting the credit sales if applicable, paying for services like CAM, Electricity,water, telephone, staff salary & refreshment, misleneaous expenses

etc. But a part of this finance has to be brought in by the franchisee as long term finance from his own source. This money is called margin Money often referred to as working capital which is considered to be the lifeline for any business model to operate.

B) RECURRING COSTS:These are the costs that are incurred regularly in running and managing the franchise business. These include :Funds to make lease payments:-which involves huge payouts especially as cost of retail space is the most important part of any business format. Usually the cost runs in several lakhs as the Franchisee has to make an upfront payment of security deposit of 3 to 6 months along with 1 month advance payment. Funds to finance credit sales:- especially in case of stores which offer goods on credit to their selected clients.

Working capital:- for suppliers, salaries etc. In addition to the long term working capital the franchisee has to arrange short- term funds to meet its day to day need of cash to pay for staff salary and other expenses. Royalties :- as percentage of sales to be paid to the franchisor. Franchisors typically requires a franchisee to pay continuous royalty fees. The fees are a % of the gross business earned from the business. Advertisement:- expenditure to be paid to the franchisor. This amount is normally a small percentage of gross income. NON FINANCIAL COST:Here the franchisee looses his independence and freedom to make changes in his business even when he may be convinced are beneficial to the business. The most common inconvenience

that have to factored are as follows:a) Fixed SOP( Store operation procedures) set by the Franchisors in maximum cases. This practice is followed by most of the Franchisors basis on their past experiences on the mode of operation which leaves little or no scope for the Franchisee to experiment basis on his localized experience. At times, it leaves the franchisee to get so frustrated when he is not able to implement his own ideas even when he is fully convinced that it would lead to better results. b) Inability to make changes rapidly- A franchisor often prohibits the franchisee from selling products or services other than those approved by the franchisor. There are occasions when a franchisee strongly believes that there is a strong customer demand for a new or modified product. Franchise system normally have a method for making suggestions and this is often a cumbersome and time consuming process.

Further, the Franchisee is subject to the decision made at the corporate office of the franchisor, who at times may be unaware of the ground realities of some of the franchisees. McDonalds & Pizza Hut have taken several years to add specific items like Allu Tikka Burger& Shahi Paneer Pizza to their menu for their outlets in India. c) Dependent on Franchise success:- The success of the franchise usually depends on the franchisors success. Some of the well known brands have failed in India for example Papa Jones Wimpys etc. Hence, it becomes important to carefully examine the Franchisors business model before investing into it. Other examples of failed business is Dockers from Levi Strauss Ltd.

d) Duration of relationship:- Franchise is usually sold for a limited period of say 9 years( 3+3+3) which may or may not be renewed for another/additional period at the sole discretion of the Franchisor. Here the Franchisor has the power to modify the Franchisee terms including the franchisee fees and royalty

payments. Hence, it becomes very important from the Franchisee to examine properly all terms & condition before taking up a Franchisee business.

CORE VALUES OF A SUCCESSFUL FRANCHISEE: Attitude towards employee involvement. Positive attitude for success. Sales oriented. Responsiveness to customers. Social Orientation. Drive to success.

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