What is a Franchisee?
As a start-up, you don’t have to be creative. At least when it comes to starting the business. And that brings you to the franchise and its franchisees.
The latter participate in the business idea of the company’s founder. The concept is mature and has proven to be successful; franchisees who enter the system via franchise agreement multiply this success. This enables them to run one or more companies.
Compared to a traditional self-employed person, however, a franchisee has more entrepreneurial leeway. His counterpart, the franchisor, makes many specifications. But that is also an advantage of the franchise systems because the two franchise partners share the work.
Who is suitable as a franchisee?
If you are toying with becoming a franchisee, you should first question yourself. On the one hand, business knowledge is required for self-employment.
On the other hand, the work of a franchisee, at least at the beginning, is more time-consuming than in some salaried jobs. In addition, to become a franchisee, you need a lead character who can and wants to take on responsibility.
You should also be clear that you have to subordinate yourself to a model of the franchise system. This means that as a franchisee, you have to accept decisions made by the franchisor that you may not like.
Last but not least, interesting franchisees should be clear that the task – despite the system – involves financial risk.
How do I become a franchisee?
Once the decision to start your own business with franchising has been made, it is a matter of finding the right franchise system for you.
You can choose from around 1,000 companies; the first criterion should be the business idea or the product/service that you want to sell. Only those who identify with the respective system can later have success and fun.
Becoming a franchisee: what else does it take?
A handful of systems should be examined more closely. The exam includes studying the company’s website, having documents sent to you by the franchisor, and talking to them in detail.
The franchisor should be able to present business figures and explain the exact costs and likely revenues, such as profits. Another part of the clarification: which services the head office takes on – as this differs from system to system.
In order to become a franchisee, you have to do a little market research and write a business plan. Having a few on-site conversations with other business owners will give you a sense of whether you are in the right place with your branch.
The business plan is also important for the discussion with your bank, which will give you a loan for franchise financing.
Your advantage as a franchisee: In contrast to the classic self-employed, your business plan is specified by the system based on points such as target group and USP.
One should also be aware that the right location is an important criterion for the success of starting a business. This can often only be demonstrated by the existing system.
Once you have decided on a location, it should receive area protection, i.e., no further franchisees may open within a certain radius. Depending on the system, this even has to become part of the franchise agreement.
No matter how convincing the numbers and the business concept are, you shouldn’t do it if the human factor is not right. This can often only be found out if potential franchisees talk to the existing ones and also sit in on the branches there.
Excellent franchise systems are characterized by the fact that – before the contract is even signed – they make the everyday life of a branch clear to interested parties in training courses.
What is important when it comes to financing?
It is a small bouquet of various investments and costs awaiting the franchisee. On the one hand, there are the one-off investments, for example, relating to establishing the branch.
In some franchise systems, there is also an entry fee that averages around 100 K. In addition, the franchisee pays an ongoing franchise fee, which is based on sales and usually accrues monthly. In some systems, there may be additional fees or lump sums for IT consulting, for example.
No franchisee can expect to be profitable in the first year. It is, therefore, important to set aside an amount for the start-up losses.
The total investment costs vary widely. In over half of the systems, these costs are below 500 K in the first year of franchise establishment. For around 40 percent, franchise partners have to pay between 1000 K and 2000 K. At around seven percent, more than 200,000 euros must be expected.
What are the rights and obligations of a franchisee?
The rights and obligations arising from the franchise agreement, which forms the basis of the franchise partnership.
The franchisee has the right to basic and advanced training measures, to a system manual that explains the franchise system, to advertising and sales promotion measures, and, in general, to comprehensive support from the franchisor.
In addition, the franchisee must adhere to certain rules. He has to pay the agreed franchise fees, take part in further training, carry out advertising measures, and generally work with the franchisor.
What do I earn as a franchisee?
Generally speaking, it is like this with most franchisees: In the first year of foundation, the result is red; in the second year, a black zero is written, and in the third year, there is a profit.
In most systems, the franchisees have the capital invested back after around five years. However, this can be very different depending on the system, location, and your own qualifications. Therefore, it is important here to question the business model and one’s own competencies in detail.
As for salary, considering all franchise systems, franchisees in an established location can earn 5,00,000 to 10,00,000 years in pre-tax years. If the system is smaller, the franchisee companies’ salary is around 20,000 to 35,000 per year.
What are the opportunities and risks?
The great advantage of being self-employed with franchising is that the franchisee can rely on a tried and tested company concept, the founding knowledge, and the franchisor’s experience.
The business risk of failure is thus reduced. From day one, the franchisee can concentrate on his most important task, customer acquisition. Along with the successful franchisor, the franchisee companies can also obtain loans from banks more easily.
Despite the circumstances, there is, of course, a financial risk. The real disadvantage, however, is that the individual franchisee has little scope for creative work.
Do I always have to set up a franchise company?
No. Existing locations can also be taken over. The potential of the location can then also be better assessed.
In addition to in-house operations that issue franchise systems, this is particularly about franchise succession. Many franchisees want to sell their businesses, for reasons of age, for example. There is a wide range of franchise companies for sale.