Buying a Franchise the Benefits and Pitfalls
New entrepreneurs who are looking to start a business often look to franchising to find their next opportunity.
For many would-be entrepreneurs, franchising is an interesting opportunity as it offers the chance to be your own boss without taking on the significant risk that comes with starting a business from scratch. In a franchised business, the franchisor trains franchisees on their operational, marketing and business administration rules and regulations. You are buying the brand awareness the franchise has generated and this makes getting into business via franchising a very attractive choice for many people.
BENEFITS AND ADVANTAGES OF BUYING A FRANCHISE Independence:
Franchising offers entrepreneurs the independence of small business ownership all while being supported by a larger network of people and resources. With a franchise you operate under the banner of an already established brand name. The entire system from opening to daily operations and more is already tried and tested and ready to be deployed to another franchise unit. In theory, there should be be far less work (and cost) involved in trying to establish and build your franchise. The brand is already known and trusted in the marketplace and therefore should produce a stream of customers.
NO Experience Required:
You do not need to have any experience in the industry in which the business operates. This is true for 95% of franchised opportunities other than those that require a specific degree or license, like an accounting practice for example. I advise individuals to look at what their passions and hobbies are when selecting a franchise. Additionally, you do not need to have any business experience either,
you will get all the training you need from the franchisor.
Higher Rate of Success:
Franchises generally have a higher rate of success than an independent start-up as it is a more secure investment. Franchises are a more secure investment than new businesses because they have the support and backing of a larger, established corporation. These corporations have business models that have been tested, often in different markets across the country, and have already proven themselves to be effective.
Easier Financing:
Because a franchise already has a history of success, getting a loan is easier than if no historical data was available. Banks find franchises to be a less risky business to finance because of their history of proven success. Investors are far more willing to invest in a business with an established network, a known brand name and operational and financial support.
Collective Buying Power:
When you purchase a franchise and become part of a buying group that the franchisor has set up. The franchisor builds relationships with suppliers that result in lesser costs to the franchisee for products they would otherwise have to buy elsewhere. This means that inventory should be less expensive because of the franchisor’s collective buying power.
Brand Recognition:
The most difficult task in any new business is generating customers. This is one great reason to buy a franchise, you get the benefit of the recognition and awareness that your franchisor has already created. When you buy a franchise, you bypass a lot of the work that goes into marketing and branding a new, unknown business. With a franchise you have access to an established brand with already loyal customers and this can give you a quicker head start to making money and earning profits by drawing customers from day one.
Franchisor Support:
Most franchisors prioritize supporting their franchisees -- especially when they are just starting out -- by offering them pre-opening assistance with operations like site selection, design, construction, financing, training, and grand-opening programs. The help doesn’t stop there: Some franchises even give loans and other forms of financial assistance to their franchisees.
Be Your Own Boss:
Owning a franchise gives you the flexibility of being your own boss, within the confines of the franchise system though. Many feel a greater sense of control over their careers and have an even better quality of life. Franchising’s motto is “be in business for yourself but not by yourself”.
“Most franchisors prioritize supporting their franchisees especially when they are just starting out.”
PITFALLS AND DISADVANTAGES OF BUYING A FRANCHISE
Just as with any business model, there are disadvantages to buying a franchise.
Formal Agreement:
Buying a franchise means entering into a formal agreement with your franchisor. Essentially you are “renting” their business model for a specified period of time. Once the Agreement ends, the franchisor may not be required to renew it. By the same token, you can also decide not to renew if you are not satisfied with the performance of the brand.
Limited Control:
The franchisee has no, or very little, control over the business or how it is operated. There are usually restrictions covering, amongst other things, territory, the products you use and sell and where to buy them, marketing and promotions and more. How the business operates is set forth in the franchisor’s operations and other manuals and franchisees are generally not permitted to go beyond the confines of them.
Initial Investment Can be High:
Depending on which franchise you choose to invest in, the initial investment can be very high, especially for bigname brands. However, when you think of the hundreds to millions having been invested to perfect the brand and systems, it is still cheaper than going solo.
“A franchisee will often be expected to pay an initial cost to buy into the franchise agreement. As part of the continuing franchise agreement, they will then be paying on-going fees for the support, training and marketing provided by the franchisor.”
Financial Information is Shared:
Franchisors collect financial information from their franchisees on a regular basis in order to improve the unit’s performance and profits, as well as to calculate royalty and marketing payments. This means that a franchisee has no confidentiality regarding financial information. Not to worry though as the information is kept internal and only shown to those who “need to know”. However, if you are doing business correctly you should have no reason to be shy to provide the franchisor the information it needs. The franchisor also uses the information to benchmark a unit’s performance as compared to the rest of the system. This can be a huge advantage for franchisees to help improve their financial performance and business profitability.
Franchise Costs:
This is a big disadvantage for most franchises – the costs. A franchisee will often be expected to pay an initial cost to buy into the franchise agreement. As part of the continuing franchise agreement, they will then be paying ongoing fees for the support, training and marketing provided by the franchisor. In the long term, this means a restriction to the amount of profit (and money in your pocket) that you can make as a franchisee. However, in my opinion it is a small price to pay given that 95% of businesses go bankrupt within 5 years, whereas 85% of franchises are still in operation.
Difficult to Exit the Business:
Selling a business can be challenging. Selling a franchise business can have potentially more pitfalls as any buyer is bound by the terms that have been negotiated with the franchisor when a franchise was granted. The initial franchise agreement will probably have been negotiated for a fixed period, so even if the business has been successful, the terms of the franchise will have to be re-negotiated on renewal and any potential buyer may be deterred by the uncertainty of the terms the franchisor may seek to introduce on renewal.
In conclusion, franchising is a great way to get into business especially your first one. However, franchising is no guarantee of success and the same principles of good management - such as informed decision-making, hard work, time management, having enough money, taking care of your employees and serving your customers well - still apply.
Lori Karpman is president of Lori Karpman & Company A fullservice firm providing a full range of consulting and legal services.