Tuesday, October 2, 2007

Is starting a franchise business in India a good idea ?

One of the business options open to India’s first time or small entrepreneurs is to take up a franchise. Buying a franchise of an established brand is a good alternative to starting on a new idea from scratch or could offer a faster way to take an existing business to the next level.

This option offers several advantages - not the least of which is an opportunity to latch on to a tried and tested model. A well established franchise brand also affords instant visibility, and with most rules being laid out already by the franchisor, you don't have to waste effort reinventing the wheel.

However, and yes, there is a "however", you need to consider several factors before deciding on a franchise business. Exercising adequate diligence prior to sign up could be vital to the end result.

Start with the motive

Prioritize your reasons for wanting to enter this business. What do you expect to get in terms of return on investment or annual income? Most important, do you have the commitment to go the distance?

It is very important to be sure that you really need the brand to make a business. Many franchises are generic in nature, and not much is offered by way of specialized knowledge or support. If there’s a chance you can enter the business by yourself, minus all the franchise costs, maybe it is better to go it alone.

Don’t unless you have adequate funds

The better known brands come at a hefty price. The annual franchise fee itself can run into several lakhs of rupees, and will vary with territory. Different franchisors adopt different models – we know that (at least some years ago) leading garment retailer Arvind would place goods on consignment and pay franchisees a commission on the value of the sale. On the other hand, the training and education company CADD Centre charges a territory based flat franchise fee, regardless of volume.

When you start negotiating, the franchisor is likely to sell you some dreams and their ROI calculations will likely focus on initial franchise fee, royalty payments if any and capital expenditure for setup.

However, remember, that the business is not likely to pay for itself for a while, so the ongoing requirements will be substantial. Don't take it up unless you have the resources to hang in there for three years.

If you still have conviction in the idea, but are strapped for funds, rope in some partners; in any event, don't start still you have enough resources.

Be sure you can handle it

Even with a franchise business, some basics don't change. As with any venture, the success of a franchise will depend on whether you and your team have the requisite skills to run it. A good franchisor is choosy about who they sign up as a franchisee. In the same way, you should choose a franchise opportunity that draws upon your capability or passion or leverages the strengths of the existing business in some way.

An important thing to consider is how much the new franchise business will divert your focus and passion from existing commitments. Is it strong enough to stand by itself? The franchisor will insist on you being personally involved in the formative years of the venture, so you will need to have a back up arrangement in place for the current business.

If you’re a late comer to the franchise, chances are that you will be offered a territory that is not in the large metropolitan cities or the city of your residence. That’s not necessarily a bad thing, because in general, the tier 2 towns in India are exhibiting much higher growth than the large cities.

So, don’t reject the opportunity at the outset. However, this presents some challenges as you look to manage the business long distance. If the proposed franchise territory is unknown to you, spend extra effort to:

Assess the market potential. Get the franchisors to visit along with you and give you their opinion.

Figure out whether the right manpower is available to handle the franchise in your absence. If you have a personal acquaintance in that town, willing to help, that is a huge advantage. Also look for a strong sales or marketing team, since you cannot expect to do all the selling on your own.

Being the first to enter a new territory can be of advantage in the future, when the franchisor company wants to expand their footprint, since you are likely to be offered the right of refusal.

Some other questions you should ask yourself right away:

  • Do I need any start up training?
  • How many people do I need to begin operations?
  • Have I considered all the risks?

If the answers are comforting, continue the dialogue. You will now be faced with the nitty-gritty.

Scrutinize the franchisor’s track record before finally taking up their offer. Sure, the brand is doing well, but how are franchisees treated? What support services and training resources do they provide? Talk to other franchisees before coming to any conclusion.

Franchises come with pre-conditions regarding minimum outlet size, operations methodology, territorial restrictions and so on. Know what you can and cannot do.

The Franchise Agreement will be the most important document governing your relationship. The agreement will list out the rights and obligations of both parties, and spell out the dispute resolution mechanism. Get a lawyer to read it. As a franchisee, you may not have any say in this matter, since the agreement will be standard fare for all franchisees, but it is important to be forewarned about any red flags.

Last but not least, be clear in your mind that you have zeroed in on the right franchise opportunity. There are many big opportunities but not all of them will be suitable. Choose the one that you are prepared to stand by for a while. Companies such as Franchise India work towards bringing partners together. Might be worth a call.

No comments: