A Deal Worth Considering?
By: Jotham Lim
After years of saving, you managed to pool together a hefty sum of cash, eager to start your own business. However, without any entrepreneurship experience whatsoever, you considered buying into a franchise thinking that most of the heavy lifting is handled for you by the master franchisor.
Or maybe you are an already established F&B (Food & Beverage) store owner, but sales have been stagnating for quite some time. You plan to start your own franchise, thinking that it is a great alternate source of revenue while leveraging existing assets that you already have.
Many people find themselves in the two situations stated above, but is running or buying your own franchise a logical next step to take? We have reached out to Mr Irwin Hoo, co-founder and partner of Kebab Bowl, a local kebab franchise, to pick his brain on franchising and bring perspective to both sides of the story.
Where are the common misconceptions people have regarding franchising?
Most “franchises” we see on the market right now are not exactly franchises, but the trading of licenses between a licensor and licensee. To establish a proper franchise requires many strict guidelines and requirements, i.e. having a central kitchen. However, for the sake of the article, we can continue to label these businesses as franchises as it is commonly accepted in layman terms.
Many entrepreneurs think that F&B is a lucrative business, especially with many local success stories such as Tealive and MyBurgerLab. They are not exactly wrong, but it is not easy to replicate those successes. From the outside, it looks like running an F&B business is easy, but it is true only when it is already established and successful. It will not be easy running an F&B business from scratch, even if you are buying into an already established franchise.
Is buying a franchise a good starting ground if I wish to start my own business?
To answer this question, we must first look at what are the advantages and disadvantages of buying into a franchise.
The most significant pull factor in buying into a franchise is that everything is taken care for you. The brand is already established, the equipment is standardised, and the SOP (Standard Operating Procedure) is already developed. The franchisor will generally walk you through the entire process, providing guidance, staff training and even location consultation.
In short, what makes franchising attractive is that they offer a worry-free business solution. The master franchisor is incentivised to help you grow your business because your success will directly translate to their success as well.
However, what makes franchising so great is also its greatest downfall. The lack of freedom and control over the products and services is a significant turnoff for many entrepreneurs who have the itch to improve and innovate. You are unable to change the recipe, adjust the protocols, or even come up with your own marketing plan.
Let’s say that your branch is underperforming, and you wholeheartedly believe that having a “buy 1 freer promotion will significantly boost customer footfall. However, the master franchisor will most likely reject your request, unless they plan on implementing the same concept to all branches. It is understandable because uniformity is the core of any franchise. Having inconsistencies in products, marketing and promotional materials will gravely hurt the brand image.
Let’s say I am interested in buying a franchise. What are the factors that I should take into consideration?
The two biggest questions you should ask yourself before buying a franchise are:
- What is the business model?
- Is it profitable?
No two franchises are the same, and each has their own individualistic operational styles and functions. It is vital to understand the business model behind the franchise to determine if the business is right for you, and more importantly, to draw the line between the franchisor’s and franchisee’s responsibilities.
It does not hurt to do some prior research and determine if a franchise is profitable or not. More often than not, the salesperson will try to sell you on a dream of running your own business without much input. They will show you their best-performing branches and the profits generated from them, but it is even more important to take a look at the lesser performing branches not run by the master franchisor themselves.
Doing your own homework and research is imperative. Find out the common problems faced with this industry and brush up on your managerial and hiring skills. Underperforming and unethical staff is a universal problem, not just for F&B franchises. You will find yourself dealing with staff members being late, stealing food, procrastinating, and you have to be both mentally and strategically planned for that.
Finally, you need to consider your initial capital and your ability to persevere. The average lifespan of a restaurant is generally between three to five years, and it takes a lot of effort to beat the norm and survive past that. Do you have enough capital to pay your staff and survive for three years? Are you able to withstand the emotional pressure of not earning any profit during the initial stages of running the restaurant?
How does the relationship dynamic look like between a franchisor and franchisee?
It is not that far of a stretch to say that the relationship is as if a parent and child. There will be a lot of handholding and guidance because many franchisees have no experience working in the F&B industry. They have no idea how to train the staff, follow SOP, and even how to make arrangements with the contractor or vendor. That is why most franchisors offer training programs to help prepare the franchisees on how to run the store, but on how to be an entrepreneur in general.
In most cases, the franchisee’s responsibility is to supervise the store, monitor the staff and make sure the quality of the food is consistent. The most common complaint I have hard so far is underperforming and lazy staff. However, staff management is generally outside the scope of the franchisor. We provide a platform for aspiring business owners to get their feet off the ground, but the franchisees are responsible for the success of their stores as well.
In many cases, when the franchisee displays a lack of motivation to run the business, the franchisor might offer to repurchase the franchise from them. It may not necessarily be a sad occasion, as the franchisee is able to recoup their losses and the franchisor has better control of the branch as well. However, it is important to read through the contract, as most of them include an exit strategy if any of such cases may arise.
What makes a franchise successful?
There are actually two types of F&B franchises. The first is a business that is built with franchising in mind from the get-go, and the second is an F&B business that performs well and got convert into a franchise halfway through. The former is much more streamlined because the necessary infrastructure and workflow pipeline has already been established. The former would face much resistance when converting from an individual store, and it requires more time and effort to establish a functioning franchise properly.
However, both are equally likely to be successful as long as three criteria are met:
- A brand that is well established
- An SOP that is uniform, efficient and automated
- A Business model that is easy to replicate
A well-established brand is actually all-encompassing, which includes proper food quality, excellent customer service, a clean environment etc. Anything that is visible from a customer’s perspective all contribute to the brand image of the franchise itself. A business that can run by its own frees up the owner to pursue other businesses or goals in life. An easily replicable business will determine the rate of growth and expansion of the franchise within a particular region.
What makes franchises so appealing to consumers is the consistency and familiarity that goes along with the brand. Before stepping into a newly opened Starbucks, you can already picture the decor; the items on the menu and the atmosphere you will be immersing yourself into. This is especially true for tourists, who have no idea what the local independent cafes can offer.
I’m interested in buying a franchise. Sign me up!
I appreciate the enthusiasm, but for newcomers who have no experience working in the F&B industry, I highly recommend them first to consult an F&B consultant. Many people have fallen for the honey trap laid by master franchisors and got themselves tied up in a deal that they are not adequately prepared for.
Having a consultant is a great way to get a second opinion and determine if the business is right for you. A well-informed, well-prepared franchisee is a great partner to work with and an invaluable asset in helping expand a franchise further.
Finally, before you fully commit to the idea of buying a franchise, be prepared for an intense first year. There will be signs of struggle through the early stages of the business, but with enough commitment and capital, I am confident that you are able to pull through.