Franchising a viable business model in today’s economy

The growing cost of conducting business has placed unprecedented pressure on Australian entrepreneurs.

The COVID-19 pandemic saw a staggering increase in business insolvencies. This surge in failures has left aspiring entrepreneurs pondering a crucial question: Is this the right time to embark on a new business venture?

A recent analysis by NAB underscores the severity of the issue, revealing a 30% increase spike in insolvencies during 2022. As business survival rates hang in the balance, experts and industry veterans have begun to re-evaluate the franchise business model. With this in mind, let’s explore the enduring relevance and adaptability of franchising and the pros and cons of this business model.

A Time-Tested Model

Franchising, though not a new concept, has proven to be remarkably resilient and adaptable. Originating in 1851 and gaining significant traction in the 1950s, franchising has witnessed steady growth. Today, there are over 94,000 franchise outlets in Australia alone that employ almost 600,000 people. 

The Franchise Council of Australia found that 95% of franchisors, and almost all franchisees are small businesses with fewer than 20 employees.

But the critical question remains: Is this age-old model still pertinent in the current volatile climate? Are entrepreneurs better off going solo when starting a business?

Brand equity

One of the foremost advantages of the franchise model is the immediate access to established brand equity. Franchisees enter the market with a recognisable and trusted brand, which has already cultivated a loyal customer base. In a competitive landscape where consumer trust and familiarity play pivotal roles in decision-making, this brand recognition can prove to be invaluable.

Starting a business from scratch often requires significant time and resources to build a brand presence and earn consumer trust. Franchising offers entrepreneurs a shortcut by allowing them to tap into an existing brand’s reputation and customer base. Each franchise has a network to continue adapting to new technologies, marketing and systems for staff retention. 

Mitigating risk 

The current economic uncertainties have made risk management a paramount concern for budding entrepreneurs. Franchising, as a business model, inherently reduces certain types of risk compared to launching an independent venture. It provides a safety net by offering a proven business model, comprehensive training, and ongoing support from the franchisor. This support structure can be a lifeline, especially for first-time business owners who may lack experience in managing all aspects of a business.

Additionally, economies of scale in purchasing and marketing can help franchisees weather the storm of rising operational costs, another critical advantage in today’s cost-pressured environment.

Financials

Franchising often offers a more predictable financial outlook compared to standalone businesses. Franchisees benefit from standardised operating procedures, established pricing models, and collective bargaining power when procuring supplies. This framework allows for greater financial stability and, in many cases, a quicker path to profitability.

Franchising allows entrepreneurs to benefit from a proven financial model. The franchisor’s financial track record and support can be invaluable when seeking funding or investment partners. Banks and investors often view franchise businesses as less risky due to their established success rates and are more likely to invest in over independent small business start-ups. 

Business Support and Counsel

In an era where adaptability is key to survival, franchisees have the added advantage of ongoing support and counsel from the franchisor. This guidance can encompass everything from operational best practices to marketing strategies and technological advancements.

The franchisee-franchisor relationship is akin to a partnership. Franchisees can draw upon the franchisor’s expertise and experience, making it easier to navigate changing market dynamics. This support system provides an edge in staying ahead of the curve.

In the face of mounting economic challenges, franchising remains a robust and relevant business model. The advantages of brand equity, risk mitigation, financial stability, and ongoing support make franchising an attractive option for aspiring entrepreneurs. Franchising offers a tried-and-tested path to business ownership, even in today’s tumultuous economic climate. The key is to carefully assess the specific franchise opportunity and ensure alignment with your goals and values. With the right franchise, the future can be as bright as ever.

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