The Franchise Alternative

One way to avoid some of the management headaches associated with starting a business is to invest in a franchise, an approach that enables you to use a larger company’s trade name and sell its products and services in a specific territory. In exchange for this right, the franchisee pays an initial fee and often monthly royalties as well to the franchiser (the corporation). (Прибов)

There are three basic types of franchises. In a product franchise, the franchisee pays the franchising company for the right to sell trademarked goods, which are purchased from the franchiser and resold by the franchisee. Car dealers and gasoline stations fall into this category. In a manufacturing franchise, like a soft-drink bottling plant, the franchisee is licensed by the parent company to produce and distribute its products, using supplies purchased from the franchiser. In a business-format franchise, the franchisee buys the right to open a business using the franchiser’s name and format for doing business. The fast-food chains typify this form of franchising. (Саванчук)

The latest trend in franchising has been diversification in the variety of products and services offered. Today, franchises range from day-care centers and health clubs to dental clinics and video-tape rental outlets. By and large, most are service operations. (Лавренов)

Advantages of Franchising

Why is franchising so popular? According to the president of the International Franchise Association, franchising has triple benefits: “The franchiser wins because he builds a strong foundation for his company. The franchisee wins because he can take advantage of the franchiser’s proven business system. And the general public benefits from the consistency of the product or service." (Титорович)

The biggest winners are generally the franchisers, who are able to expand their businesses through franchised outlets without depleting their own capital. Franchisers not only expand their business using other people’s money, they also receive regular income from franchisees, who pass on a percentage of their gross revenues and help pay for advertising and promotional costs. (Лазук)

Investing in a franchise can also be good for the franchisee, because the risk is reasonably low. Ninety-two percent of all franchise outlets make it through their fifth year. When you invest in a franchise, you know that you are getting a viable business, one that has “worked” many times before. You also have the advantage of instant name recognition and mass advertising. An independent hamburger stand can't afford a national TV advertising campaign, but McDonald’s, Burger King, and Wendy’s can. Few franchisees are able to write a check for the amount of the total investment. Most obtain a loan to cover at least part of the cost. According to the Department of Commerce, 16 percent of all franchisers provide some form of financial assistance such as low-rate loans. Another 34 percent assist the franchisees in preparing loan applications for banks, private investors, or the Small Business Administration.

Besides financial aid and advice, the franchiser gives a new franchisee training in how to run a business. (Филиппова)

Although franchising offers many advantages, it is not the ideal vehicle for everyone. For one thing, owning a franchise is no guarantee of wealth. It may be the safest way to get into business, but it is not necessarily the cheapest. According to some analysts, it costs 10 to 30 percent more to buy a franchise than to open a business independently. And not all franchises are extremely profitable operations. (Насалевич)

One of the most significant financial variables is the monthly payment or royalty that must be turned over to the franchiser. The fees vary widely, from nothing at all to 20 percent of sales. (Морозова)

Another drawback of franchises is that they allow individual operators very little independence. Franchiser can prescribe virtually every aspect of the business, down to the details of employees’ uniforms and the color of the walls. Franchisees may be required to buy the products they sell directly from the franchiser at whatever price the franchiser feels like charging. Franchisers may also make important decisions without consulting franchisees. (Лабоцкая)

Company Structure

Would it be better for you to be self-employed, or to be a director of a limited company? What difference does it make? Each legal entity has advantages and disadvantages. Here we have set out some of the pros and cons associated with each option.

* Sole Trader

* Partnership

* Limited Liability Partnership

* Limited Company (Прибов)

Sole Trader (Self-Employed)

This is a business owned by one person. Legally, the person and the business are one and the same. All financial risks are taken by that person and all that person's assets are included in that risk.

Pros