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Many prospective entrepreneurs look at franchising as a way to become business owners without having to build something from scratch. However, the decision to purchase a franchise shouldn’t be made in a rush. The belief that the franchise model is less likely to fail than other businesses is a myth.
Even though buying a franchise can be less expensive than starting a business from the ground up, it still requires significant capital investment. In addition, running a franchise business requires a lot of hard work, and you must be prepared to operate your new business based on someone else’s rules. A franchise is a commercial and legal relationship between the franchisor (owner of a company) and the franchisee (an individual who is starting a franchise/branch of that company using the company’s business model and trademarks). Remember that the franchisee sells the goods and/or services that the franchisor provides.
Following, check out some of the pros and cons of buying a franchise so you can make a well-informed decision.
The Pros of Buying a Franchise
Regardless of the type of franchise — from fast food and hotels to automotive and hair salons —most franchises come with the following benefits:
Startup Stage Can Be Skipped: One of the biggest advantages of buying a franchise is bypassing the most difficult steps of starting a business, which include writing a business plan, conducting market research, creating a minimum viable product, testing that product and eventually raising funds for the business either by approaching a bank for a loan or a venture capitalist, which can be the biggest hurdle for many entrepreneurs in getting their company off the ground. However, with a franchise model, you can skip all of these steps, because the business model has already been tested and proven to work, and raising capital becomes relatively easier.
Access to Training and Support: Franchises are largely successful because they make their business models easy to replicate and follow, which includes the franchisors training the partners and employees at all locations in how the business works and should be conducted.
Training is usually provided in the areas of daily operations, various opening procedures, point-of-sale software and other in-house technology, along with access to professional development programs. For instance, Midas Auto Repair offers ongoing industry training in such areas as diagnostics, maintenance and wheel alignment, in addition to help with business management, marketing and customer relations.
Brand Recognition: One of the toughest aspects of starting a new venture is finding your first customers, which involves a significant marketing and branding effort. A franchise comes equipped with a brand name that people know and trust. For example, when a customer walks into a Ford dealership or a Burger King outlet, they know exactly what they will get.
A franchise gives you access to an established, recognized and loyal consumer base along with a potential employee pool. It can also give you an expedited path to profitability by bringing in customers and prospective employees right from the start.
Marketing and Advertising Bonuses: Marketing and advertising are some of the quickest ways to drain cash. As a franchisee, while you may have to invest some time and resources as part of your marketing and advertising efforts, the parent organization will invariably promote your business via its nationwide campaigns, including TV, radio and online campaigns.
In addition, you’ll receive valuable input and help from the franchisor on how to develop and execute effective marketing campaigns of your own. They may also provide a marketing plan that includes market research, strategies, sales forecasting and budgets.
Collective Purchasing Power: When you buy a franchise, you enjoy the benefits of the franchise system. Because of your franchisor's well-established and deep-rooted relationships with vendors, you get access to materials at a lower cost because of their increased buying power. They may also buy large amounts of inventory and equipment on your behalf, which means you get to acquire such assets at a reduced cost.
Easier Access to Financing: Raising capital is something that all entrepreneurs have to do, regardless of whether they’re starting their own businesses from scratch or buying a franchise, and securing that money is never straightforward. For one, Small Business Administration (SBA) loans are known as the gold standard in business loans for business owners looking to integrate high-interest debt, buy equipment, hire staff and more; however, you need to meet stringent eligibility requirements in order to get these.
Securing an SBA loan is relatively easier with the franchise business model because the SBA earmarks a portion of its loan allotment specifically for franchises. However, before applying, make sure to verify whether the franchise you’re interested in purchasing can be found in the SBA Franchise Directory.
Real Estate Resources: Big franchisors usually are quite resourceful, often because of having been in the business for a while. They can help you acquire a great location for your franchise business. Many of them also have in-house real estate departments, while others have connections with national-level commercial real estate companies. This helps them too, because the more money you make, the more money they make in the form of royalties.
The Cons of Buying a Franchise
The franchise model isn’t without its challenges. Here are some of the most common ones:
High Startup Costs: A franchise tends to be a capital-intensive business — sometimes the cost of buying into a franchise can be higher than if you were starting a business from scratch. You are required to pay an upfront fee to the franchisor, along with ongoing royalty payments (a percentage of the total gross sales), in order to use their name and set up shop. This fee can sometimes run into the six, or even seven figures. You might also be required to have a minimum net worth, some liquid cash and good credit standing. So select your franchise carefully, as the bigger the brand, the more expensive your investment requirement will be.
Reputation Management Problems: Irrespective of how well-liked your particular franchise is, when something goes wrong at the parent organization, it can cause significant negative consequences for all franchisees. For instance, if there’s a scandal at the national level, your business can also get affected. Case in point is Subway’s pitchman Jared Fogle getting arrested in 2015 soon after the unfortunate death of the company co-founder Fred DeLuca, which subsequently led to the number of franchisees falling by 1,221 between 2015 and 2017. The damage to the Subway brand was so severe that many of the franchises were forced to close down in response to the public backlash. According to food industry research firm Techonomic, the brand’s domestic sales declined for four straight years as rivals continued to grab customers from various Subway locations.
Limited Flexibility: Starting your own business means you want to be your own boss. But if you are a franchise owner, that’s not necessarily the case for you. Although you’ll have some autonomy in how you run the business, for the most part you’ll have to follow the rules, regulations, system operations and directives of the franchise. Even if you’ve found a better and more efficient way of conducting business, it may not matter if the franchisor doesn’t agree with you. In fact, in some cases if you make any big changes to how the franchise is run, you may incur huge penalties or have your agreement terminated.
Some franchisors also tend to micromanage their franchisees to a great extent. Depending on the contract, they may have a say in such details as the business’ physical location, hours of operation, signage, layout, pricing and resale terms, among other things.
Contracts Can Be Tricky: When you buy a franchise, you’ll be signing some sort of contract with the franchisor, which will detail all the things you can and cannot do as a franchisee. If you falter on even one of the things, you could end up losing your franchise altogether. And if you want to shut down your franchise, you might find the process of doing so extremely complicated. Also, once the contract reaches its end date, the franchisor has the right not to renew it — you also have the power not to renew it.
The bottom line is that buying a franchise is a good idea for some and may be a bad idea for others. Before you take the plunge, weigh the pros and cons, do your own research and don’t forget to seek legal advice. Additionally, you may also refer to the Federal Trade Commission’s Bureau of Consumer Protection’s Business Center’s Buying a Franchise: A Consumer Guide before making the final call.