The Pros and Cons of Buying a Franchise

Most would-be entrepreneurs consider buying a franchise as an interesting business opportunity.  This is mainly because you get a chance to be your own boss from the start and don’t need to start a business from scratch. Also, when you start a new business you are faced with a  lot of unknowns, whereas with a franchise you get a successful model that is already in motion.

Although franchising offers several advantages for most would-be business owners, there are some disadvantages you should be aware of, before deciding to buy an existing franchise.  It’s a decision that shouldn’t be made overnight and the key thing to remember is that the popular notion that franchises are less likely to fail than other businesses is just a myth. Running a franchise is also hard work and you need to be prepared to operate your new business based on someone else’s rules.

In this article, you find some basic pros and cons you should be aware of before embarking on a journey of buying a franchise.

The Pros

Startup stage skipping

Just like with most things in life the beginning of a new business is hard.  At the startup stage, you need to write a business plan, do market research, test your product, and if the testing goes well, scale it. When you buy an already established franchise you are able to skip these sections.  The whole system has already been tested and it has proven itself to work and so basically you need to apply an established system to your market.

Name recognition

In the beginning, it is always difficult to get your customers to recognize your brand.  With a well-known franchise, you already have a name that people know and trust. So, when you purchase a franchise most of the work is already done for you, and customers know what to expect.

Lower risk

Most established franchises have the backing and support from large and established corporations. Most of these corporations have already tested business models in different markets across the country and are without a doubt effective. Because of their history of success getting a loan for a buying a franchise is always easier than getting a loan for starting an independent business. Banks are always more eager to invest in an existing franchise than in a new business that hasn’t had an opportunity to prove itself in the market.

Training program

Every successful franchise has an easily replicable system. This includes employee training on how business is done at every location. New employees will get on-site training on opening procedures, daily procedures.

Marketing and advertising

Naturally, when you purchase a franchise, you will be required to invest your time and money in

Marketing and advertising. The big advantage is that the franchises themselves will promote your business through nation-wide campaigns that will be broadcasted on TV, radio, and online.

Be sure that you will have a dedicated input from your franchise on how to create and execute your own effective campaigns. What they may also provide is a marketing plan that will cover market analysis, sales forecast, and budget.

Gain increased purchasing

The main advantage every big business has over small businesses is their access to increased buying power. Franchises often purchase large amounts of inventory on behalf of their franchisees, which means you will acquire these major assets at a low cost. Also, you will benefit from your franchisor’s deep-rooted relationship with suppliers.

Access to financing

The biggest obstacle in buying a franchise is naturally the price.  Although the exact cost differs depending on the franchise,  there are franchise fees that cost hundreds of thousands of dollars and in some cases, the whole investment can cost one million $. On the other hand, some cost tens of thousands of dollars but even that can be a big investment for most people. Not to mention the royalty fees and other startup expenses

Most business owners commonly seek financing whether they are starting a new business or buying a franchise. Getting secure financing is never easy.  The gold standard in financing is SBA loans and in order to get them, you need to satisfy stringent eligibility requirements.

Some of the SBA loans are specifically reserved for franchises but keep in mind that you can obtain a loan easier if you qualify for an SBA microloan for starting a business of your own.

Developed technologies, work methods, and deep-root relationship with suppliers

After you join the franchise network, you will quickly obtain knowledge and technologies created and fine-tuned by the former franchisor. This way you will be able to avoid mistakes that are common at the business start, you will have access to already proven suppliers and developed work methods.  This will essentially reduce the possibility of bankruptcy and potential damage which commonly happens due to business inexperience. Also, it will decrease the time needed for launching a business and achieving operational quality.

The benefit of economies of scale

When you join the franchise network, you will have the chance to use the advantages of economies of scale.  These include areas of goods and services supply, marketing, scientific research, technological development, and other crucial business processes.  When developing a non-franchised business, you don’t have the chance to receive the same cost and benefit ratio you would have by joining the franchise network.

You are your own boss

When you own a franchise, basically you are your own boss. You will be able to create a more flexible schedule for yourself and overall will have more autonomy over your career and even work from home.  

The cons

Working by the franchise’s rules

Every business owner loves to be his own boss, but with franchises, things are a little bit different. You will maybe have autonomy in how the business operates, but most of the time you will have to follow the rules. Which means system operations, regulations, and instructions of the franchise. Also, if you have discovered a more efficient way to do business, that might not mean anything if the company doesn’t approve of it.  You probably won’t get the resources for your idea also.

High initial investment

Of course, it always depends on what franchise you are going to invest in, but some initial investments can be very costly, especially for big-name franchises. However, there are always lots of franchises that can be afforded with any budget. Do your research, and watch out for the royalty fees some franchises charge their franchisees. Typically, the royalty fee is 4-6 % of your gross sales revenue and it shows depletion to your profit potential.

Limited creativity

Franchises always have a pre-established brand, therefore there are significant creative limitations for franchisees who are looking to explore, make changes, or add something new to the company’s business model or brand.  You will also have restrictions set on where you can operate, what you can sell, and also what suppliers you can use due to the pre-established business model.

Shared financial information

Most franchisors frequently gather financial information from their franchise as a way of improving their business model and analyzing royalty payments. Because of this, franchisees have very little privacy in their business finances. However, renowned franchise companies have a good habit of sharing most of the financial information back with their franchisees. This allows them to compare their performance with the rest of the franchise system. By doing this, franchisees are able to improve their performance and profitability.

 Franchising contracts aren’t irreversible

An important thing you should be aware of is that the contract you made with your franchisor isn’t permanent. When the contract finally reaches its end date, the franchisors have the right not to renew it. However, you also have the power not to renew it, if you are not satisfied with your franchise.

Marketing and advertising expenses

When you invest in a franchise, many contracts will oblige you to pay for the marketing and advertising expenses.  Because of this, you must always read your contract thoroughly in order to be aware of all the conditions you are accepting.

Reputation management issue

It doesn’t matter how good your franchise is positioned, it is still bound to the national franchise. This means that if the brand has any issues it will always affect your business outcome. Also if there is a scandal in the national office or another franchisee gets bad publicity, your business can also be affected.

Contractual agreements

When you decide to purchase a franchise, you will be obliged to sign a Franchise Disclosure Agreement, which states what you can and cannot do as a franchisee. If you break one of these requirements you can easily lose your business. Also, if you decide to leave the business, the process of shutting down your business will be much more difficult than if you didn’t sign a contract with the national franchise.

 How to find the right franchise?

If you’re having trouble finding a franchise that interests you, then maybe you should attend some annual franchising trade shows. There you will have the chance to many franchisors and experts in one location. From time to time, these shows educational seminars that can help future franchisees get a better insight on what to expect and what are the advantages and disadvantages of owning a franchise.

If you already have a clear idea of what franchise you would like to own, the best way to start is to contact the franchisor.  By doing this you will get all the information about the availability, cost, and other crucial details about the franchise.

Another way is to contact existing franchisees who are already looking to sell their franchise.  This way you will probably save some money because you may avoid some of the initial franchise fees.

Investigate the franchise

Before you do anything, it is best that you do a thorough investigation of the franchise you are interested in. The time you spend investigating the industry, market and the franchise itself will make you more confident in your decision on whether to buy or not to buy. If you rush things and make the wrong decision, it can cost you tens of thousands of dollars and not to mention the loss of time and energy it will create.  So, try to be thorough and don’t rush this important step.

 Before you decide to buy, make sure that the franchise has an established reputation, quality products or services, adequate capital, and foremost satisfied franchisees.

Dangerous waters and detailed questions

Sometimes buying a less-known franchise that is not that expensive can be dangerous.  Just because a business is selling franchises, doesn’t mean that it will be successful. Remember, sometimes selling their franchises is their business and that’s all they are interested in. The success of individual franchises is quite irrelevant to them. This doesn’t mean that inexpensive less-known franchises are worthless, but a reminder that thorough investigation is necessary

If you decide to go this way, don’t be surprised if you are asked detailed questions about your finances. A franchisor will also want to know about your personal assets, and this is mainly because they want to make sure that you have a fall-back position to carry the business if it goes into financial difficulty. You will also be asked about your spouse’s financial situation, in order to make sure that you both are ready for the financial commitment that is necessary for running a successful franchise.

You will surely be asked about your background, experience, and aspirations. These questions are carefully designed to help the franchisers decide whether you are the right person to run the business successfully.

Final thoughts

Remember that franchises prosper from teamwork. Other than just you, there is your franchiser and every franchisee that works for your company.  The community should be supportive collaborative an that’s why before you decide to purchase, make sure in what kind of community you are getting yourself into. Do your research and if you pick the right franchise, you will be on your road to success.

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