Can franchising be a viable side hustle? | Money Talks ft Lush Singapore's Nafees Khundker

Key Concepts

Franchising, Entrepreneurship, Brand Value, Royalties, Franchise Fees, Operational Costs, Marketing Costs, Partnership Model, Limited Liability Company (LLC), Risk Assessment, Exit Strategies, Communication with Franchisor.

Why Franchising?

Nafi Kunker, master franchiser of Lush Singapore, chose franchising over starting his own brand due to the established brand value, ethical standards, and proven business model that Lush offered. He emphasized the value of learning from an existing system, highlighting the years of experience a brand brings, which can help avoid common startup mistakes. He and his wife wanted to start something of their own in Singapore, and franchising provided a structured path.

Nafi's Experience: Lessons Learned

Nafi shared a cautionary tale about a previous franchise venture in the F&B sector. Despite paying franchise fees, royalties, and securing a location, he realized the business wasn't a good fit and the numbers didn't work. He made the difficult decision to cut his losses, emphasizing the importance of thorough research before committing to any franchise.

Quote: "You really have to do your research well before you get into any journey."

Franchising vs. Starting from Scratch

The key difference lies in the starting point. A new business requires building everything from the ground up – product development, branding, processes. Franchising provides a pre-built system with established processes, products, and brand value, giving the franchisee a head start. However, this comes at a cost, as franchise fees and royalties are involved.

Cost Considerations: Owning vs. Franchising

There's no definitive answer to whether owning or franchising is cheaper. Building your own brand offers long-term control and potential for significant growth, but requires more initial effort and risk. Franchising offers a quicker start but involves ongoing costs and less control.

Key Factors:

• Franchise Fees: Can range from low six figures for upcoming brands to millions for established brands.
• Royalties: Ongoing percentage of sales paid to the franchisor.
• Equipment & Inventory: Some franchisors require franchisees to purchase equipment and ingredients from them, potentially at higher costs.

Budget Breakdown for Franchising

Nafi provided a percentage-based breakdown for a mid-range F&B franchise:

• Initial Royalty: A few hundred thousand dollars, potentially covering 3-5 units.
• Ongoing Royalty: 3-10% of sales, depending on the franchisor's support level.
• Rent: 25-30% of revenue, a significant factor in Singapore.

Strategic Advantage: A strong brand can help negotiate better rental terms with landlords.

Operational Costs and Brand Influence

Franchisors often dictate operational aspects, including equipment and ingredient sourcing. While this can increase costs compared to independent sourcing, it ensures brand consistency.

Marketing in Franchising

Franchisors typically provide marketing guidelines and materials, but franchisees may have limited flexibility. Some brands, like Lush, have specific marketing restrictions (e.g., no paid advertising), requiring franchisees to be creative within those boundaries.

Business Structures: Partnership, Sole Proprietorship, LLC

The choice of business structure (partnership, sole proprietorship, or limited liability company (LLC)) is generally the same for franchise and non-franchise businesses. However, Nafi recommends an LLC for its limited liability protection, especially when dealing with contracts and overseas operations.

Benefits of LLC:

• Limited personal liability.
• Easier access to banking and credit.

Costs of LLC:

• Higher maintenance costs.
• Taxes.
• GST registration (in Singapore).
• Accounting and auditing fees.

Lush's Partnership Model

Lush operates on a licensed partnership model, referring to its franchisees as "partners." This signifies a deeper involvement and shared stake in the business's success. Partners have more autonomy within established guidelines, and both parties benefit from growth.

Difference from Traditional Franchising:

• Traditional franchising involves a franchisor-franchisee relationship with royalty payments based on sales, regardless of profitability.
• Lush's partnership model fosters a more collaborative approach with shared benefits.

Risks Involved in Franchising

• Brand Alignment: Ensuring that the franchisee's values and objectives align with the brand's is crucial.
• Reputation: A brand's reputation, both positive and negative, can significantly impact the franchise's success.
• Market Fit: Understanding how the brand will resonate with the local market is essential.

Hidden Costs

• Legal Fees: Associated with reviewing franchise agreements.
• Mandatory Marketing Fees: Set aside for marketing initiatives.
• Global Requirements: Participation in global promotions, even if they don't align with local strategies.

Exit Strategies

There isn't a specific exit strategy outlined, but maintaining open communication with the franchisor is vital. A strong relationship can help navigate challenges and find mutually beneficial solutions.

Key Takeaway: Prioritize open communication with the franchisor to address issues and uphold the brand's reputation.

Conclusion

Franchising offers a structured path to entrepreneurship, leveraging established brands and proven business models. However, it's crucial to conduct thorough research, understand the brand's values, and carefully consider the costs and risks involved. Open communication with the franchisor is essential for navigating challenges and ensuring long-term success. The choice between franchising and starting from scratch depends on individual goals, risk tolerance, and available resources.