Blog - Fitness Franchise

The Advantages of Buying a Franchise

Franchising Provides Reduced Risk

While franchising does not guarantee success, a good franchise can help reduce the chances of failure.  Franchising offers a proven system as franchising features a tested operating system, the franchisee avoids many obstacles and benefits from several opportunities. When purchasing a franchise, the franchisee receives access to a proven system that includes initial training, opening assistance, accounting systems, established suppliers, manuals and use of trademarks. This fact helps prevent the franchisee from repeating previous mistakes. It also provides the franchisee with statistics and information on inventory levels, competition, store design, pricing structure and operational data.

Easier Access to Financing and Reduced Cash Requirements

Since franchises frequently have a higher success rate, many financial institutions prefer to lend to franchised systems as oppose to brand new businesses.  In addition, the consumer awareness and name recognition of a franchise often reduces the grand-opening promotional costs and advertising spending.  Finally, the purchasing power of the franchisor reduces the franchisee’s initial equipment and supplies expenses.

Franchising Provides Purchasing Power

The franchises purchasing power on products, supplies, equipment, advertising, health care and insurance often easily offsets the cost of ongoing royalties paid by the franchisee.

Site Selection Assistance

Franchisors provide site selection assistance based on their experience and demographic knowledge. In addition, many landlords and developers prefer to deal a business that has an established track record. This allows franchisees to obtain locations in major shopping malls and other developments that would not otherwise be available to an independent operator.

Franchising Means Advertising Clout

Many independent businesses cannot afford advertising and promotional expertise which can sometimes result in advertising that is poorly conceived and/or inconsistent. Furthermore, most independent businesses cannot afford the level of advertising required to maintain a strong presence in the marketplace.   In a franchise system, advertising costs are spread across many units. This allows the franchisor to reduce costs due to economies of scale. It also lets the franchisee create more extensive, well-conceived promotional campaigns and lets them place the advertising effectively.

Building Equity

Franchises come with territorial exclusivity and national or regional name recognition. This means that many franchised business often sell faster and for a higher amount than independent businesses. In many cases, the buyer wishes to buy the franchised business for the same reasons as the original franchisee.  Buyers may also associate a higher value with the franchise’s recognized name and system.

Franchising Means Reduced Stress

Franchises reduce many of the pressures of owning a business. They often operate more effectively due to the established systems that control scheduling, cash flow and inventory levels. This lets the franchisee focus on running the business instead of the business running him or her.

The Disadvantages of Buying a Franchise

Loss of Independence

Although most franchisees invest in a franchise because they want the guidance of the franchisor, some franchisees view the loss of independence that comes with a franchise as a negative.  One of the greatest strengths of franchising is consistency and with consistency comes compliance. You should think twice about entering into a franchise relationship if you are not capable of working within a system and accepting some regimentation.

Franchisor’s Failure to Perform

For several reasons, some franchisors don’t deliver what they promise. A common reason for failure is the franchisor’s shortage of available capital. This shortage of capital can be caused by:

a. Unrealistic franchise sales projections by the franchisor;

b. Underestimating the expenses of the development of the franchise system;

c. The franchisor’s failure to meet franchise sales projections, or

d. High franchisee attrition.

In other cases, the franchisor is not capable of providing support and assistance and he or she does not have the ability to operate a franchise organization.

Misunderstanding the Franchise Agreement

Problems can arise when either the franchisor or the franchisee becomes confused or does not understand the interpretation of certain aspects of the franchise agreement. Many potential franchisee have likely never encountered a document that is similar to a franchise agreement. It is important to remember that a franchise agreement requires careful explanation and scrutiny. Failing to do so can result in a conflict that could end up in court.

Misrepresentation by the Franchisor

Misrepresentation by the franchisor can be intentional or unintentional. Projections of income and expenses are often good faith, but it may end up that they are inappropriate for the location. In many cases, this is due to the franchisor’s inexperience or unfamiliarity with the area’s demographics.  However, in some cases, the figures may be total fabrications simply to get the franchisee to sign the agreement and hand over the initial franchise fee.

Caveat Emptor (let the buyer beware) applies to franchising as it does to any consumer purchase or investment. However, consumers often choose to ignore cautionary advice and warning signals. This happens when a consumer primarily bases their investment decision on emotion without balancing it with logic.

Payment of Fees

The franchisee typically pays an initial fee for being granted the franchise, using the system, and receiving initial training. Typically, these single-unit franchise fees range between $25,000 and $35,000. The initial fee is paid only once during the term of the agreement. However, some franchisors may charge a renewal fee at the commencement of each new term of the agreement. The typical term for a franchise agreement is 5 or 10 years but this may vary in order to match with the terms of a lease. Franchisors sometimes charge a site selection fee in addition to the initial fee. This fee is generally $5,000 or more and is charged in order to offset their costs of site selection and lease negotiation.  In addition to the initial fee, an ongoing royalty is paid by the franchisee to the franchisor. In most
instances, the royalty is based on a percentage of the franchisee’s gross sales. This can vary from 1% to 10%,
(or higher) with a median range of 3% to 6%. It is important to note that units with high sales volumes often pay 1% or 2% less.  Franchisees are also required to contribute to a national or regional advertising fund. These costs are in
addition to any requirement that the franchisee invest a minimum amount on local advertising.

Franchising in Canada

What is Franchising?

Franchising is a method of doing business where the franchisee is provided the right to sell, offer or  distribute goods or services under a plan or system that is provided and detailed by the franchisor.   Franchising is a strategy for developing and penetrating a market and for achieving a large market share.

What is a Franchisor?

A franchisor is the company that owns and controls the franchise system. The franchisor provides the license to operate the franchise according to a particular method and with the products or services developed by the franchisor.

What is a Franchisee?

A franchisee is the company or person who pays the franchisor for the franchise and the right to use the system.

What is a Franchise?

The franchise is the right granted to an individual or a group to use the trademarks and systems of the franchisor and to promote the products and/or services.

Types of Franchises

The current definition of a franchise emphasizes the continuing relationship between a franchisor and a franchisee. Most franchises can be classified as product or service franchises or business format franchises. Most franchises combine characteristics from both categories.

Product or Service Franchise

Trade Name Franchises

In a “Trade Name” franchise, the franchisor allows the franchisee to distribute goods under the franchisor’s trademark. This type of licensing arrangement includes is found in businesses such as automobile dealers,  soft drink bottlers, home entertainment stores and service stations. Typically, early franchises were trade name franchises.  In these franchises, the franchisee is generally required to conform to certain standards relating to the
quality but, apart from that, he or she is free to conduct business without any control or guidance from the franchisor.

Business Format Franchises

Business-format franchising is the most common form of franchising today. This form of franchising involves more than just the licensing of a product or service. In these franchises, the franchisor also provides the method for running the business. Most franchises today combine product and business formats.