Starting up your own business can be daunting. Either because you have to put forward the initial capital, or because of the ensuing risk: will it be successful? For entrepreneurs who want to start up their own business alone but do not want to feel totally solitary in the business world, opening a franchise is a good first step.
A franchise is a business where a company which is already in operation - such as The ONE or Café Havana - sells its rights to an existing business model and logo to a third-party operator.
As the operator, you are then known as a franchisee, and have the right to offer products and services under the license and name given.
Phil Bedford, master franchisee for the Referral Institute Middle East believes the franchise model is perfect for people who want to work for themselves, but not by themselves.
"They are actually buying into system and product that has a history of success. For example, McDonalds is a franchise. People buy the rights to use the system and apply it to produce the product," he said.
"Everything is provided from a 'how to' step by step to training. Normally rights are bought to represent a franchise and then a royalty fee is paid monthly on revenue to the master franchise," said Bedford.
In order to operate a franchise, an initial investment is needed. Under this, the franchisee will be given rights to trade under the business name, use all intellectual property related to the brand, and have the right to the training and support needed to operate on a daily basis. All good franchisors will also provide guidance as to where to set up shop, and provide ongoing support and give direction as and when required to make the business work.
The master company or franchise, is known as the franchisor.
The franchisor owns the overall rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business. The franchisor usually charges the franchisee an upfront franchise fee for the rights to do business under the franchise name. In addition, the franchisor usually collects an ongoing franchise royalty fee from the franchisee.
Many companies in the UAE are run under the franchise system, across all areas of business.
The biggest benefit to opening a franchise is minimizing risk. Starting a new business is risky. Most studies show that more than 90% fail within three years. The primary reason that the failure rate is so high is because the new owners have to go through the learning curve of running a business.
Another reason to buy a franchise is that a franchise investment can be researched before any significant expenditure is made. Existing franchisees offer a wealth of information about the business so that new franchisees can try the business before they buy to make sure it works for them.
One of the biggest benefits to franchising is marketing. An established franchise will offer name recognition. When the franchisor pays for a professional advertising campaign, it will benefit all franchisees.
"With a franchise you tend to follow a proven system. This said, make sure the franchise is one with a history and not a new one," said Bedford. "Carry out your due diligence. For the economy in general, it is fair to say that more succeeding business means more business is generated as a result. There are more jobs provided, less companies in bad debt," he said.
In addition, the franchiser can provide advice about how to develop effective marketing programs for a local area through a cooperative marketing fund, to which the franchisees contribute a percentage of their gross income.
Franchising provides a system of operation that is uniform across all bases, so that consumers receive uniform quality, efficiently and cost-effectively. The advantages are brand identification, and customer loyalty, capitalizing on the proven format.
However there are also potential downsides for franchisees. These include a lack of independence from the goods and services they sell to the interior decorating; mandatory company-wide promotions that may not work in your market yet cost money to implement, costly required redesign of their unit(s), and, after signing a 10- or 15-year contract, a change in management or ownership that takes the brand in a new, unwanted direction.
However, franchising remains a very popular method of conducting business in Dubai and the wider UAE.
© Zawya BusinessPulse 2013
