Is Franchising the Road to Entrepreneurial Success

After the great apocalypse hullabaloo of the past weeks, after the scare of a few or fun and laughter of the many, it is high time to talk about things more useful to living our daily lives. After so much talk about the specter of dying, it’s now time to talk of the business of living.

Let us, therefore, get back to business, or more specifically, micro business. After all, we are just ordinary folks trying to eke out an existence in this damned (or not so damned, after all) earth.

For wannabe businessmen like us, so much information has been flooding the net about franchising as some sort of short-cut to business success. We have associations actively promoting for the multitude to go into franchising. There are also stand-alone blogs actively promoting franchising.

A franchised business is reportedly easy to set up. Many have succeeded, they say. The suggestion is that this is the best way to go, if we want success in business

Hence, many of our folks – ordinary guys like you and me, OFWs, retirees and the like, have tried their luck at such activity, hoping to find entrepreneurial bliss.

Is franchising really, the road to entrepreneurial success? Shall we therefore go with the franchise bandwagon or march to the franchise beat?

Now, let us see if we know something about this issue or we can analyze this in the context of what we already know from the earlier posts.

But first let us define the word to make things clear. Let us see what its elements are and then, having grasped the concept, try to answer the simple question we have posed.

Investorwords.com defines franchise as a form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor’s trade name and usually with the franchisor’s guidance, in exchange for a fee.

This is one of the simplest and easiest definitions I have ever encountered. Whichever way we slice this definition, we can deduce three elements to a franchise.

First, that there is already a successful product or service by a first party called franchisor. Second, that a second party called a franchisee enters into contractual relationship with the franchisor under the former’s trade name, business model or operating methods and guidance. And third, that the arrangement is in exchange for a fee or fees to be made to the franchisor.

The most important advantage of the franchise is that there is already a tested product/service and successful method of doing business to start with, hence, the franchisee does not start from a zero base. This is the strongest selling point of a franchise. This is also the strongest source of the franchise hype.

On the disadvantage side, the most prominent is that the franchisee must pay the fee or fees associated with the franchise. There usually is an upfront fee called franchise fee and, more importantly, a royalty fee which is usually a fixed percentage of the monthly sales.

The amount of the franchise fee and the percentage rate of the royalty fee vary according to the strength, reputation and track record of the franchise. The more successful, the stronger and bigger the business franchise is, the higher are the fees associated with it.

This, in a nutshell, is what a franchise is.

The legendary investor Warren Buffett gives us a more useful meaning of franchise by dividing companies into either a franchise or a commodity business. Buffett explains that an economic franchise “arises from a product or service that: (1) is needed or desired; (2) has no close substitute; and (3) is not regulated.”

In contrast, according to Buffett, a commodity company has products or services that are indistinguishable in the minds of consumers from its competitors. Commodity businesses are very similar to each other, regardless of the line of business.

In such a context, the type of the business or the line is immaterial. It is how the business stands with the rest that determines whether a business is a franchise or a commodity.

Well, we need not go deep with Buffett’s analysis to see the problem with most so-called franchises being peddled around.

So many so-called franchises are nothing more than commodity businesses; they are franchise only in set up or in form but certainly not a franchise by Buffett’s definition. They can hardly be distinguished from other businesses operating in the same line.

True franchises have pricing power and can raise prices to improve profitability. It also stands in strong position to withstand fierce competition.

In contrast, a commodity business becomes very profitable only if it is the low cost operator or the supply of its products is tight. A commodity business will find it difficult to withstand fierce competitive attack.

How does this jibe or how do we synthesize this with the question of whether franchising is the road to success?

In the real world, many franchisees find out to their dismay, that their franchise is not what it was pictured out to be. The cold reality is far below the hype.

With fierce competition around, they find difficulty generating sales robust enough to make the business flourish. Worse, they find out that most of their sales is absorbed by the royalty fee and the overhead. There is hardly anything left as profits.

The fact is that, whether one should go for a franchise or not, is just one of the issues that a would-be entrepreneur faces.

There is a forest of issues. The issue of whether to opt for a franchise or not, is not the forest. It is just a tree in the forest.

Remember our post on “Going Into Business is Like Swimming Upstream or Going Into War”. One should not have any illusions that franchising makes the business a walk in the park.

Franchise or no franchise, going into business is swimming upstream and is difficult.

Or the post on “Are You Willing to Work Long Late Hours and Forego Much of Your Social Life”. Franchise or no franchise, you have to work long late hours.

Before one even decides whether or not to go into franchise, he has to do his planning, his research and his study. In short, he has to do his homework.

If you do your homework, then the issue of going or not into franchising will be answered in the process, probably without much struggle.

Having said all these, I dare say that franchising is not the secret nor short-cut to entrepreneurial success. I believe there is no secret nor short-cut at all.

If ever there is something as close to a formula at all, it is probably this: preparation…doing your homework, your research, your study, your planning.

After that, what remains is taking action or pulling the trigger in accordance with the plan or the study.

If you fail, then learn your lesson and try again. And again. And again until you succeed.

That is what almost every successful entrepreneur say.