Is a franchise a safer way to launch your business in uncertain times?
Is a franchise a safer way to launch your business in uncertain times?
Posted 2022/08/17 by PRO BRO

Kristijonas Minelga, business development manager at PRO BRO Express

Our current turbulent times offer many business opportunities. At the same time, growing inflation, the shortage of materials and deteriorating consumer sentiment have the power to not only sour the beginning of new business – they can also make it extremely risky.

In times like these, entrepreneurs with money to invest are increasingly inclined to favor the franchise business model. This trend is particularly clear in the US market, where experts predict that 17,000 new franchisees this year will create a quarter of a million jobs. At PRO BRO Express, we are also finding this upwards trend reflected in the car wash franchise market in Lithuania.

Although there are no reliable, general franchise business statistics in Lithuania, US figures can illustrate the growing popularity of this business model. According to the International Franchise Association (IFA), 2021 was a particularly great year for franchise businesses in the US. It is predicted that this year, the GDP generated by franchises will reach $501 billion, with the total number of franchise jobs rising to 8.5 million. Franchise business accounts for 3 percent of US GDP and is a significant part of the world’s largest economy.

A underused business model

One of the main reasons why franchises are so popular even in times of economic trouble is the relatively low level of risk they offer. Investing in a franchise means investing in a tried and tested business model – one which can operate based on existing financial indicators rather than predictions. Also, along with an already-known and developed brand, franchises also inherit a loyal customer base. It is important, however, that the franchisor is invested in the success of the franchisee. They need to systematically introduce franchisees to the entire business management process, present them with pre-installed and operation-ready infrastructure, share accumulated knowledge, conduct training, and consult the franchisee throughout the process.

Of course, buying a franchise is not a 100% guarantee of success. That being said, it is a far more dependable option. After all, most mistakes will probably have already been made and the most important lessons learned while the brand was being developed by its owner. So with a franchise, the business risk is lower than it would be starting from scratch. Although studies proving this have yet to be conducted in Lithuania, research carried out by the IFA, alongside other international surveys, have shown that about 90 percent of franchises continue to operate successfully not only after two, but also after five years from their establishment. Compare that to the fact that around 45 percent of businesses fail within the first five years, and we can see that success rates for franchises are far higher than those of self-founded businesses.

In addition, a further advantage of franchising has recently emerged. This business model provides the franchisee with the opportunity to objectively assess the business’s resilience to crises and the effect that economic shocks, the pandemic, the war and record inflation has had on its results. While building a franchise business may not fully satisfy creative needs, it is a great solution for those who want to not only invest, but to become actively involved in business management as well. In contrast to investing in funds or securities, here you not only operate with numbers, but also make decisions regarding business and personnel management and development. So, it is extremely important to identify the field that you want to build a franchise business in.

At PRO BRO, we have been closely observing the popularity of franchises in our sub-industry. It has held steady despite the current turmoil in the global markets and the war in Ukraine. Currently, 7 out of 10 PRO BRO Express tunnel car washes in Lithuania are franchised. Some have already been sold as franchises and are under development. What works in our case is not only the fact that franchises are a safer way to start a business, but also that our business is relatively resistant to external shocks, as the demand for the services we offer remains steady. Moreover, timely investment in cost-reducing and sustainable solutions has also helped to cushion the impact of the war in Ukraine. After installing water recycling systems, 90 percent of water is recovered for reuse, so more than 220 cars can be washed in one tunnel in an hour. This is significant both environmentally and financially.

Our franchisees value our years of experience, recognizable brand, proven track record and our business model that provides customers with a good experience. Franchisees do not need to worry about preparatory works – we select the best locations for a new facility, design it, and build it. All that remains for them to do is to buy the equipment, allocate funds to start the business, and operate the business using the management tools that we have provided. Inspired by success, some franchisees are already buying their second facility.

After the success of the franchise model in Lithuania, we will continue the search for franchisees in Vilnius, Kaunas, Klaipėda, Šiauliai and Panevėžys. In addition, we are also making moves abroad. In the first half of next year, PRO BRO Group will open the first tunnel car wash in Riga. And in the next three years, up to 10 facilities are expected to open in Latvia. We are planning to enter the Estonian market in the near future.

How we are planning our business development abroad according to detailed analysis of the markets we have conducted. After assessing the needs of customers and development costs, we expect to open facilities in Scandinavian countries and, in the long run, in Western Europe.

For those considering buying a franchise, it is worth paying attention to these five things:

First, be sure to carefully read and evaluate the franchise disclosure document (FDD) prepared by the franchisor. Is the document complete? Does it look professional or amateurish? Pay particular attention to the financial indicators.

Second, franchisors should share facts, not predictions based on promises, and clearly
present the income and expense structure of the business. If they only talk about advantages, don’t be afraid to ask additional questions.

Third, be sure to talk to other franchisees. Try to choose whom you speak with on your own so you don’t end up in a staged meeting. Also look into both success and and failure stories, if there are any, to properly evaluate all scenarios.

Fourth, do not rush, because buying a franchise is a serious and demanding investment. An honest franchisor should be interested in your success and sign a franchise agreement only when they know that you are financially and psychologically ready.

Fifth, familiarize yourself with the risks of the franchise you are buying. Although businesses are built thinking about the benefits, no business is without risks and challenges. So be wary of a franchisor that doesn’t mention them.

Posted 2022/08/17