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Pros and Cons of Buying A Franchise

Posted By Joel Libava On December 8, 2011 @ 2:30 pm In Franchise | 30 Comments

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 [1]

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 [2]. 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 [3] 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 [4], 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 [5] 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 [6] (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 [7], there will be certain items that you must carry in your inventory. If you invest in a Seattle’s Best Coffee franchise [8], 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 [9] (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 [10]. 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 [11], 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.


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URLs in this post:

[1] Image: http://smallbiztrends.com/wp-content/uploads/2011/11/pros-cons.jpg

[2] McDonald’s: http://www.mcdonalds.com/

[3] more about franchisee training: http://savvy.entrepreneur.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article77928.html

[4] Here’s what a franchise marketing plan looks like: http://www.mplans.com/sandwich_restaurant_marketing_plan/executive_summary_fc.php

[5] Balihoo: http://www.balihoo.com/local-marketing-automation

[6] 7-Eleven: http://franchise.7-eleven.com/

[7] Ace Hardware: http://www.myace.com/

[8] Seattle’s Best Coffee franchise: http://seattlesbestfranchise.com/

[9] Franchise Disclosure Document: http://en.wikipedia.org/wiki/Franchise_Disclosure_Document

[10] was posted on YouTube in 2009: http://www.readwriteweb.com/archives/dominos_youtube_video.php

[11] SignsNow: http://www.signsnowfranchise.com/