October 31, 2014

Pros and Cons of Buying A Franchise

As with anything in life, there are pros and cons involved and it’s important to consider every aspect of them. In this piece, we’re going to take a look at the pros and cons of buying a franchise as a way of getting into your own business.  So let’s get started.

pros and cons

Pros

Operating system:  

This is the system developed by the franchisor that enables the business to be easily replicated by franchisees.  This includes standard operating procedures and methods. By getting an already-established operating system, it means you don’t have to start from a blank sheet of paper creating everything yourself for your business. When I think of “systems” I think of McDonald’s. They’re the franchise industry standard.

Formal training program:  

Good franchisors provide good training to franchisees.  This usually includes classroom-style training at corporate headquarters. Franchisees are taught things like pre-opening procedures, daily operations, marketing techniques, hiring practices, software use, and more. There’s usually on-site training also, right at the new franchisee’s location.

Read more about franchisee training at Entrepreneur.com.

Specific marketing and advertising plan:  

Part of the general business plan, the franchisor will have a proven, detailed plan that allows its franchisees to rapidly get to market with their products or services. Here’s what a franchise marketing plan looks like, courtesy of the folks at Palo Alto Software.

One new trend in franchise marketing involves automated solutions that are designed to help franchisees at the local level. Companies like Balihoo are leading the way with this new technology.

Product supply line / purchasing power:  

When the franchisor buys products that the franchisees will use or sell, there’s a discount involved, because the franchisor is really purchasing these goods on behalf of  a large number of franchisees.  The franchisor has bulk buying power.  This makes it tough for an independent business to compete on price with the franchisee. 7-Eleven (over 36,000 stores worldwide) is one franchisor that does this quite well.

Support staff:  

Usually based at the franchisor’s corporate headquarters, the support staff can help franchisees with whatever problems they are experiencing. These support areas include, marketing, technology, sales, real estate, and operations. Some franchisors have field reps that go out to visit and assist franchisees at their locations.

Cons

Rules:  

Part of the attraction of the franchise business model is of course, the system. For a system to work properly and effectively, the users of the system must follow it closely. The franchise operations manual contains pages and pages of rules that franchisee’s must follow.

For instance, if you’re a franchisee of Ace Hardware, there will be certain items that you must carry in your inventory. If you invest in a Seattle’s Best Coffee franchise, you’re going to have to be open certain days and times. You’ll also have to purchase and use the technology that the franchisor has chosen. Everything that you’ll need will be disclosed to you, before you sign the franchise contract.

Complex legal documents:  

All franchisors that are registered in the United States must have a Franchise Disclosure Document (FDD).  All franchise buyers must be presented with the FDD before they are permitted to purchase a franchise business. There are 23 items listed in this document, including specific information about the executives of the franchise, litigation, start-up costs, franchisee obligations, franchisor assistance, and information about site selection, territory restrictions, and more. The actual franchise contract is included in the document, and it’s written in fairly complicated legalese.

Reputation management:  

Your local reputation is only as good as your franchisor’s. If the franchise brand runs into trouble, you will probably suffer at the local level. Case in point:  a pretty distasteful video that two employees of a local Domino’s Pizza franchise filmed, was posted on YouTube in 2009. Things got so bad that the president of Domino’s decided to film an apology and put it up on YouTube, himself. Dominos franchisees were definitely affected by this negative publicity.

Limitations on product/service offerings:  

If a franchisee owns a franchise like SignsNow, he or she is only allowed to sell signs, banners, and related sign materials. If the franchisee wants to add window cleaning services to the business, if it’s not in the franchise agreement, then it’s not going to be permitted.

* * * * *

When it comes time to decide on buying a franchise — or not buying a franchise — you will have to weigh these pros and cons.  You know your tolerance level for things such as needing to follow rules … versus making your own rules.  You also know whether you are the type of person who can create something from scratch, or whether you are more successful when systems and processes are already set up for you.  You will need to think long and hard about what is right for YOU.

30 Comments ▼

Joel Libava - Franchise Expert


Joel Libava Joel Libava is the Franchise Expert for Small Business Trends. Joel, The Franchise King®, equips today’s prospective franchise owners with time-tested, proven techniques designed to increase odds of success. He does this through one-on-one coaching, and gobs of useful content that can be found on places like Small Business Trends, SBA.Gov, and his award-winning franchise blog, The Franchise King Blog . He’s been featured in Entrepreneur® magazine, and is frequently called upon by national media outlets and publications for his no-spin insights into the world of franchising.

30 Reactions

  1. Joel,
    Great insight. Having the proven, well-oiled system in place is invaluable…but it sounds like you’ve got to follow rules above all. This makes me wonder if true, through and through entrepreneurs would make good franchisees. Isn’t the “building” of the business and systems at the core of being an entrepreneur? Of course a franchisee is a business owner but it feels like they lose a lot of points in the entrepreneur part of the equation. What would you say?

    Great article.

    • Thanks for chiming in, Tom.

      In my experience, true entrepreneurs are the ones who either;

      A. Invent systems, products, and/or services

      B. Re-Invent things

      Franchisors aren’t really interested in having true entrepreneurs as franchisees. They don’t listen :)

      The Franchise King®

  2. Joel,
    Thanks for the post. This is a “to the point” honest synopsis of buying a franchise.

  3. Joel, I love your two qualifiers for entrepreneurs. I’m going to use that myself (and give you credit of course). Would it be fair to say that the main key to franchisee success is listening and following instructions?

  4. Being a successful franchisee and being a successful entrepreneur is not an either or proposition. People who are creative, aggressive, resourceful, and know how to assimilate information to make the best decision have the skills to be successful in both environments. The key for that individual is to evaluate which franchise best fits his or her assets and which franchiser accepts and appreciates creativity and aggressiveness. Any potential entrepreneur needs to assess the various business situations, evaluating the tradeoffs, and then determine the best avenue for success

    • Hi Alan,

      Thanks for your comment.

      I disagree with it, though, and here’s why;

      Franchisors are in the business of duplication; they want, (and need) to duplicate their systems over and over again in the form of new units sold. They’re not looking for creativity in a franchisee. Instead, they’re looking for people that want to be in business quickly, and with a proven system in place.

      Successful franchisees are always the ones who don’t buck the system…the ones that don’t try to get all, “creative.”

      having said that, once in awhile, a franchisee does come up with an idea for a service or a product that can be deemed worthy by the franchisor.

      But, in general, if someone chooses to buy a franchise type of business because they want to bring new ideas to the table, that person is going to be quickly frustrated. And will want out.

      That’s why it’s so important for would-be franchisees to do a personal assessment before jumping into a franchise.

      There’s a free one included in my just released franchise book. And, it’s there for a reason. Several reasons, actually….

      The Franchise King®

  5. Joel,

    Is a franchise a guarantee (or close to a guarantee) of success? In other words, if you shell out $150,000 for a franchise and you get all the systems and training and marketing help mentioned, are you more likely to be successful or less likely? Have there been any studies to this effect?

    – Anita

    • Anita,

      The timing of your question is perfect.

      On Twitter the other day, a franchise broker posted that, California franchise broker put this sentence in one of his Tweets;

      “A franchise is one of the less risky type of business available. more than 80% of franchisees are successful.”

      My response, via Twitter;

      “Please, if you’re going to spit out 80% franchise success rates, let us know where you got that info. #geez” via @FranchiseKing

      His response was that he got his “facts” from a statistical report from a US Government website. I checked. It was from 1991!

      (He later told me that, “I was right.” He put that on Twitter. Classy guy.)

      I forgot to point him to this post that I wrote back in 2009 for Open Forum- http://www.openforum.com/idea-hub/topics/innovation/article/franchise-failure-rate-myths-and-facts-joel-libava

      A few years ago there were so many franchisors telling people verbally, and in their marketing brochures an even on their websites, that there was a, “95% success rate in franchise businesses.”

      Well, there’s not. It got so bad, the International Franchise Association had to draft a letter to it’s 1,000 member franchises, and tell them to “Stop It.”

      So, the short answer, (finally!) is this;

      No. There’s no guarantee of success if you buy a franchise.

      That’s a fact. Now, here’s how I , “feel” about it, and you can quote me!

      Investing in a franchise can be lower risk than a non-franchise business for someone if enough things line up in their favor, including having the right personality for the franchise business model, having sufficient financial resources, living in a location that can support the franchise concept, plus several other things.

      Anita, in my heart, I feel that a franchise business has a better chance of success than a non-franchise business if a bunch of things line up right.

      If. If. If.

      Franchise buyers; take your time, look hard at your top skills, make sure that you’re 100% okay with following lots of rules, and make sure that you have some money leftover in a sock drawer somewhere…just in case you need it.

      The Franchise King®

      • Thanks, Joel. Sounds like there are a lot of variables that can make the difference between success and failure — but that for the right person under the right circumstances, franchise ownership can give them a better shot at success. It’s a decision to be weighed carefully after considering all the factors.

  6. Anita,

    You’re right on the money!

    The Franchise King®

  7. Joel,
    I agree with your comment that for most people that franchising has less risk than starting your own business. However, recent data suggests that if you look at failure rate of franchisees ten years out, the percent is very high. Then if you factor out the very expensive lower risk franchises like McDonalds, the failure rate is even higher. Better franchisors have begun to ask why. Are we taking in the wrong people; are our systems or business plan in need of correction, do we need to tweak our management system; or do we need to understand why some of our franchises excel? Some of the recent discoveries are that franchisees who understand the system and bring creativity within the system often do better. Another observation is that franchisors who worry about franchisees’ profits do better than the ones who only worry about franchisees’ sales. Just some thoughts.

    • Thanks a lot, Alan,

      You wrote that, “Franchisors who worry about franchisees’ profits do better than the ones who only worry about franchisees’ sales>’

      I totally agree.

      Don Hay, the president of Maid Brigade, an Atlanta, Ga area international residential cleaning franchise taught me that franchisee profitability needs to be the focus of any franchise organization.

      It’s amazing; when that IS the focus, new unit franchise sales happen organically, and with no hype.

      The Franchise King®

  8. I agree that buying a franchise is a good way of reducing risk if you want to start up you own business. Unfortunately, it does not eliminate all risks and it is not a guarantee for success. I think one of the main factors of making your franchise a success is hard work. You have to work hard for your franchise a success.

    In working toward success you will have to make estimates and assumptions, which may prove to be incorrect. A good example is hiring the right people, which is always a challenge, and may be the source of substantial economic loss.

    A well-tried and tested system, a good franchisor and a hard-working franchisee are essential factors that can make a franchise a success.

  9. I’m looking to buy a franchise. I need a mentor in the restaurant industry to help and guide me through the process basically to answer any questions I may have. Do you all have any opinions on where to find a mentor or would any of you like to help?

  10. Hey Joel,

    I’m strongly considering applying for a 711 franchise here in the Long Island market. Everything Ive read so far seems pretty encouraging concerning 711 so I am feeling good about it, however, I am trying to think of some potential pitfalls that I may be overlooking. What do you think the success rate of a 711 is? What are the drawbacks? Before I go all in I could really use some advice.
    Thanks

    Joe

  11. Joe,

    Great questions.

    I don’t personally have the answers, though.

    But, I know who does.

    part of your franchise research needs to include lots of calls-and even some in-person visits of 7-Eleven franchisees.

    Ask them these questions.

    They’ll have the answers-or can at least point you in the right direction.

    I can teach you cool techniques to use, but you have to do the work.

    Call existing franchise owners.

    You’ll be glad you did.

    The Franchise King®

  12. Hi joel,
    My husband is looking at buying into a Napa autoparts store. He has experience in buying parts, doing payroll and schedules and is also an airplane mechanic. But there is no experience in owning a business. I am a little scared, any advice on how to ease the nerves and make sure we’ve crossed all the t’s and dotted all the i’s?

    • Hello Dina,

      My best advice would be for your husband to reach out to several current franchise owners and find out what their backgrounds were-and if they needed to have a lot of previous business ownership skills to get up and running.

      Here is a link to some other questions that he should ask franchisees while he has them on the phone-http://www.thefranchiseking.com/category/top-40-franchise-questions

      Best of luck!

      The Franchise King®

  13. Selina Carrisales

    Hi !
    My mom’s trying to buy a franchise with a company named, maid right, but they are just starting off their business and we’re not sure if we should invest in it if we can’t even talk to other franchisees about the disadvantages and advantages if they just started themselves as well, besides there’s only two franchisees. I was wondering if you could guides us in which direction to go in this situation?

    Thank You in advance,
    Selina

    • Selina,

      Great question.

      Since there are only a couple of franchisees, you’ll have to go more in-depth with each of them.

      Also, make sure you visit one of them-if it’s feasible.

      Go to headquarters, too. You may be able to get a goof feel for what the franchisor is like.

      The Franchise King®

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