Buying a franchise is potentially a very profitable way of owning your own small business. However, the franchisor can’t guarantee the franchise business owner will be successful.
Studies of the franchise business model have proven franchisees are more likely to be successful than if they had started a small business on their own. Still there are some pros and cons of franchising.
Some of the advantages of franchise ownership could be considered disadvantages by some business owners. Before buying franchise businesses or owning franchise businesses, read our pros and cons of becoming a franchisee.
Pros of Buying a Franchise
For example, listed under “Pro’s” for reasons to buy a franchise you might see these statements:
- The franchise system includes guidelines so you can operate the business using the franchise standards.
- You will offer only approved products and services as stated in the business model.
- Your company will train employees as per the franchise system operating guidelines, as per the training manual.
- You will advertise and promote the franchise and its approved products and services as defined by the franchisor.
But as you’re weighing the pros and cons of franchising, what if you view those things as cons? Are you the type of person who would feel operating this way would feel restrictive?
“As a franchisee, you are agreeing to follow someone else’s operating system, often including specific requirements for what marketing materials to use, which suppliers you must work with, and what specific products and services you must offer,” said Len Rainford.
Rainford, with several books published (including Buying a Franchise – The Key to Success) and 35 years experience in franchising, said someone who plans to buy a franchise should consider those elements to be franchising advantages.
“As you become more committed to the idea of pursuing franchising, it is important that you take some time to analyze yourself from a personal and business perspective,” Rainford said. “A well-structured franchising business system provides a level of support that contributes to the success of the franchise.”
Advantages of Franchising
Systems and Support
This may include site selection and site development assistance for the business, training for the franchisees and their management teams, support from the franchisor through the buying process, and R & D for new franchise products and services.
You will operate using a business blueprint developed specifically for franchisees. Having a business plan in place will help you avoid typical mistakes made by small business owners.
Franchisees will operate in a protected territory, which isn’t true of typical small business startups. A franchisor is very careful about where the business locates, which is one of the biggest advantages of a franchise.
Financing for Your Franchise Business
When you go to a bank to talk about buying a franchise from a franchisor, you’ll stand a much better chance than the average person trying to start a small business from the ground up. It is true new franchisees will pay an initial franchise fee for the right to use the business name. But along with that fee comes the security and reliability of an established business franchise.
Franchising with a business that has a well-known name carries obvious advantages. It’s something to consider when you’re weighing the pros and cons of choosing between franchise opportunities.
If your franchise business has a well-known name, you don’t have to focus on advertising to build your business. Customers will use your franchise business because they are already familiar with how it looks and operates.
A brand is one of the most valuable assets of a franchise. Think about it. You’re traveling on an interstate and see a sign for a Cracker Barrel restaurant. You already know what it will look like. You’re familiar with the menu.
As a customer, you decide what business to use and how often to use it. You make those decisions based on what you have found to be true about the brand. You trust the business to live up to your expectations.
Tried and True Marketing
You don’t need to reinvent the wheel when marketing your franchise. Entrepreneurs who start businesses from scratch usually need to experiment with marketing until they hit upon an effective strategy.
Not so when you buy a franchise. The company usually offers a tried and true marketing system. You buy this system as part of the company’s ready-made business model when you buy your franchise. You and your staff simply need to learn this marketing system to bring in the customers.
Training and Advice
Becoming a franchisee is like getting a big head start to grow a business. Setting up the administrative process? Check. A proven system of franchise operation? Check.
And the biggest Pro in the weighing of pros and cons is this – the advice, training and support from the franchisor don’t stop. That’s because although the franchisees are independently running things, the franchisor wants them to be successful.
And it is not just about the money. It’s also about upholding the reputation of the business. Since the franchise is part of a system, the success of each one benefits the entire system.
A Network of Fellow Franchisees
You’ve probably heard it’s a good idea to call up some franchisees and talk to them about franchise ownership before you buy your franchise. What you may not realize is it doesn’t stop there.
When you buy a franchise it’s like joining a big club. Others in that club have all been where you are and may have advice to offer. These aren’t your competitors as they might be if you all operated different businesses in the same small market. They are your tribe and you’ll find them eager to help.
The Opportunity for Multi-Unit Ownership
You might get the opportunity to own not one but multiple businesses with multi-unit ownership. By signing a multi-unit franchise agreement, you commit to opening a set number of units within a predetermined development schedule.
Another option is a master franchise agreement. Think of this as being a kind of mini-franchisor managing a number of sub-franchisees in a designated territory.
A Business that is Built to Sell
Finally, you’ll be building a business that should be desirable for other business owners to purchase when the time comes for you to exit.
The franchisor might help you sell your business to other potential franchisees or you could hire a broker through the International Business Brokers Association to sell the business for you.
Cons of Buying a Franchise
Being part of a system can also be a con of franchise ownership.
Consider this hypothetical example: Cuties Curls is a fictional hair salon franchise. A Cuties Curls customer who is an avid tweeter and poster gets a bad perm. Her experience makes waves (pun intended) on the internet. Customers are now thinking about canceling appointments at Cuties Curls salons across the country.
That’s one of the cons of buying a franchise. The bad acts or events at one franchise can negatively affect you as a franchisee. Even if you are running a hugely successful and profitable franchise, you could lose everything because of someone else’s bad business decision.
Disadvantages of Franchising
Initial and ongoing fees
After the initial fee, you’ll pay a monthly amount by percentage based on revenue.
Lack of Independence
Once you feel comfortable running the business, you may have ideas of how operations could be changed. Your plans may be restricted by company policy.
Fees and Costs
One of the most important considerations for you should be how much you can afford to spend.
“Within franchising, there is a business model to fit every budget,” said Len Rainford. “Think about how much you are able to invest, how much liquid cash you have and how much you would be willing to borrow.”
Research the market for the sector you want to get in, and research the franchise.
“Take time to carefully review the franchise disclosure document,” Rainford said. “In addition to earnings claims and financial statements, consider any litigation or bankruptcy information in the document.”
Especially ask about the ongoing fees you’ll be expected to pay. Talk to people who own the same franchise. If possible, spend time with the person and employees to get a true sense of how the business operates.
Questions to ask: Are you operating in the black? Have you recovered your investment? Have there been additional costs? If you’ve had disputes about fees, how was that handled?
Remember, after the initial cost, you’ll be locked into paying some type of continuing royalty fee. Royalties are usually 4 to 6 percent of your monthly gross revenue.
After you’ve done all the research, don’t stop there. Get advice from experts, such as business consultants and attorneys specializing in franchising. Listen to those people, and don’t allow yourself to be pressured by the person selling the franchise.
“Clear, written agreements and contracts can avoid uncertainty and mismatched expectations,” Rainford said. “Make sure you read and understand contracts and agreements before you sign them – once signed, contracts are binding and enforceable.”
Before the business relationship begins, the contract should include a “dispute resolution” procedure, Rainford said. The procedure should include guidelines for mediation.
“Litigation of commercial disputes should be a last resort,” Rainford said. “It is costly, time-consuming, destroys the business relationship and usually has a winner and a loser.”
Your initial franchise agreement may have a fixed term. Once that expires, you may have to pay a renewal fee.
Franchise Definitions Vary By State
The definition of a franchise is not the same in every state or country. You can’t rely on the federal definition. You must understand your state’s particular requirements.
For example, we know that franchising is a contract between a franchisor (licensor) and franchisee (licensee). Every franchise is a license. But, not every license is a franchise.
If you make any big changes to how the franchise is run, you may have to pay big penalties. Making changes might even give cause to terminate your agreement.
Are the franchise products and services protected from use by the general public in future years? The phrase “All Rights Reserved” is often used by copyright owners to indicate that they have reserved all rights. But when the All Rights Reserved copyright expires, the work becomes available in the public domain. That means that once the copyright expires, there is no means to stop others from making the product or performing the services.
Again, before you sign on the dotted line, get advice from experts.
The franchising pros are on the plus side. Even with a major brand, there’s no guarantee of success. However, if you apply hard work and dedication to a proven business model, you should get a thriving business in return.