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Factors in a Franchise that Minimize Your Risk
September 16, 2022
Starting any new business will entail risk, which is also true for opening a franchise. Trends might change, and your sales drop through the floor, a multitude of competitors open up in your area, your business might not make enough money to pay back your financing, or extremely high inflation springs up, meaning your costs rise and your customers can’t buy as much.
For a franchise, risks are the same, you still need customers and need to be able to sell your product or service. However, there are also some added elements with the business model, such as the restrictions on what you can provide or what suppliers you use, which can limit your flexibility. However, overall the franchise model actually has a number of built-in factors which limit potential risk.
6 Factors That Minimize Franchise Risk
1. Bank of Knowledge
Whether you’re opening up a new location or looking to purchase a franchise, what you’re always getting is the wealth of knowledge and experience about that particular niche held by the franchisor. It is also in the franchisor’s best interests for you to succeed, so they are more than happy to share this information with you. Such full disclosure is rarely the case in other business settings. Knowing you can pick up the phone to people who will have a great inside understanding of how to deal with any particular situation removes the franchise risk of some unforeseen event shaking the foundations of your business.
2. Proven Template
Another major factor minimizing franchise risk when compared to other business models is that you know the system you will be following is successful. As part of a franchisor’s franchise disclosure document (FDD) the franchising company must submit three years of audited financial statements. These franchise laws will reveal pretty quickly whether the claims they are making about running successful franchises are true or not. So, the result is that, having done your due diligence, you know that what you’re starting has worked well in many places, reducing the risk of the unknown.
3. Contract Clarity
While the franchise agreement and contracts you sign with a franchisor to open a franchise can put restrictions on how you operate, it also provides a lot of clarity about what you will be doing and how. Within your contract you will also know exactly how much you will have to pay each year for royalties and other expenses, meaning you can already predict your baseline costs quite well before you even make the decision to start the business.
4. Excellent Systems and Technology
With the franchise system having been in place for a while before you came along, in some cases even multiple decades, it means the franchisor has had time to really hone the technologies and systems used in the business to maximize efficiency and profitability. This takes out a lot of the risk and learning curve for the new business owner as you get to learn from the mistakes of others rather than your own and get to start using systems and equipment that have already been through the trials of tens of thousands of work days.
5. Pooled Marketing
A major risk of setting up a new business is customer awareness of the goods or services you’re selling. Marketing, especially for new businesses, can be a tough road, with limited spend to go around and not being sure where the best place is to invest it. The trial and error process until you come up with a successful marketing policy can cost a lot and lead to much frustration. However, franchises generally avoid this by pooling their marketing resources, enabling them to hold national marketing campaigns and giving each franchisee brand recognition wherever their location is.
6. Helpful Community
Of course, your franchisor isn’t the only source of in-depth knowledge about your business and how it works, there’s also the community of fellow franchisees in the same system. Most franchise systems will work hard to build bonds between franchise operators as they will often have a different approach and understanding of how the business works, putting them in a great place to assist new franchisees coming onboard. Again, this knowledge and insight takes a lot of the risk out of launching something which you don’t know much about and starting a new business in general.
Final Notes on Minimizing Your Risk
There is risk in all kinds of business, but franchise risk has a counterweight in the many advantages provided by franchise systems. Whether it’s the experience of your franchisor or fellow franchisees, the proven nature of your business template or how highly optimized your systems and technology are, franchise risk is certainly lowered by the co-operation and knowledge-sharing inherent in the business model.
If you are interested in starting a proven franchise business in a booming industry that has one of the highest renewal rates in the country at 99.5% why not talk to us here at Screenmobile to find out more.
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