As an entrepreneur, you might opt to work with an established brand and business instead of starting your own business from scratch. Franchises can have lower startup costs compared to starting a new business, and a lot of the marketing is done for you. This is why franchises are popular with many business owners who are looking for an opportunity but also want the backing and support of an established company.
But, and there’s always a but, there are numerous things to be aware of before plunging headfirst into a franchise. Let’s take a look at what to consider before buying a franchise, then we can weigh the pros and cons of franchise ownership.
10 things to consider before buying a franchise
Built-in brand recognition and marketing with less risk than a startup? A franchise business can sound like a dream come true. But, before you look to open the next McDonald’s or Subway, there are a few things to ask yourself before buying a franchise.
1. Is there a strong demand for the brand?
Ongoing success depends on the longevity of the product or service sold by the franchise. You also want to evaluate things like product quality and inventory costs. Take stock of the competition too. Is there a lot of competition regionally? What about locally? Does your area already have the franchise you want, and is it successful?
2. Is there proof the business model is successful?
Make sure that the franchisor’s business plan has been proven, and that they can support this claim with facts. It’s also important to examine the success of the franchise in your area. While smoothie shops are very popular in California and Florida, trying to open one in Maine may not generate the same level of success.
3. What are the total costs of the franchise?
The franchisor should be able to give you a good idea of all the initial, upfront costs associated with purchasing the franchise, as well as forecast costs for the first one or two years. There are hidden costs as well that you’ll want to account for, including:
- Rent and utilities
- Real estate
- Ongoing royalty fees
- Travel expenses to attend franchise training classes
- Legal and accounting fees
- Property, casualty, or liability insurance
Franchising isn’t cheap, with the average franchise price coming in anywhere from $20,000-35,000, so you should be prepared for these expenses before you invest.
4. Can you handle the life of a franchise owner?
Franchise owners are typically hands-on, meaning they’re involved in every aspect of the business. This includes everything from bookkeeping to inventory planning to customer service to cleaning the bathroom.
Unlike entrepreneurs who sell their own products, franchise owners don’t normally have much variety in their day, which can be boring for some business people. Try to imagine doing the same jobs and tasks every day for two years. If that sounds like torture, owning a franchise may not be for you.
5. What is the ongoing relationship with the franchisor?
By purchasing a franchise, you enter into a long-term relationship with the franchisor. Make sure you fully understand what the extent of that relationship is, including how the franchisor is compensated.
You will normally pay a franchise fee or an on-going royalty. Have a clear understanding of what these fees cover and what, if anything, you can expect in return for your payments.
You should also look into the kind of personal relationship and support the franchisor offers. Will they be actively helping you grow your business or will they turn you loose? You can generally find this information in forums or by contacting other franchisees in your area who work for the franchisor you’re considering.
6. What do current franchisees have to say about the company?
It’s always a good idea to seek feedback from other franchisees. Use them as a sounding board and ask them all the questions you can think of.
Keep in mind that the challenges other franchisees have may not be the same challenges you will face, but their experience of working with the parent company will more than likely mirror yours.
7. What are the legal parameters of the franchise agreement?
Make sure you review the contract with an independent lawyer and that you’re comfortable with all of the language outlined therein. Is there anything that feels like it’s not right to you or your lawyer or anything you weren’t expecting?
If you feel pressure to sign before you’re ready this is also a red flag. Deciding to invest your own money into a franchise is a big deal, and you should feel fully comfortable with your decision before committing to anything.
8. Do my skills fit the franchise?
Make a list of all the skills you have, whether they are personal or professional. When shopping for the “right” franchise opportunity, consult this list often, and ask yourself if your skills align with the day-to-day requirements of the franchise. If you’re not good with people but great with computers, then working in a job where you are constantly facing clients may not be the best choice.
Drill down your list of strengths and weaknesses, and ask others for their input. You want to be sure that you’re selecting a franchise that really speaks to your strengths.
9. What are the plans for expansion or growth?
The franchisor should have an expansion plan and should be willing to share it with you. The most important element to pay attention to is how much growth or expansion is planned for your immediate market.
If the franchisor intends to really saturate your area, you may want to reevaluate purchasing a franchise. If possible, ask for exclusivity in your market to ensure that you don’t end up getting run out of business by another franchisee that happens to have a more convenient location.
Expansion and growth can also apply to product offerings. If the franchisor plans to introduce new products, will those products be made available to the franchises? Will they be marketed and sold under another brand name in your area?
Depending on how large the franchisor is, these issues can be complex, so thoroughly review their plans and understand what options you’ll have as a franchisee.
10. How much support is the franchisor willing to offer?
Take into account how much technical, marketing or advertising support the franchisor is willing to offer. Do they have a good handle on the market and market research? Do they conduct annual surveys that help them better understand their customers? Will they make that research available to the franchisees?
Some franchisors take a very hands-off approach with their franchisees, so if you’re looking for a parent company that’s willing to provide fairly regular support, ask questions upfront to determine their level of involvement.
If you’re looking to be your own boss, purchasing a franchise might be the quickest way to fulfill that goal. However, as with any business venture, there is risk associated with it, so you should consider all of the questions listed above before agreeing to or investing in a franchise.
The pros and cons of buying a franchise
It’s clear that prospective franchisees have a lot to consider before franchise ownership. With so many things to take into consideration, is franchising worth it? Yes and no. For the right people, it can be a great way to make a living. For the wrong ones it can be a failed venture.
Consider the following pros and cons before pursuing your dreams of owning a successful franchise.
There are a lot of perks that come with owning a franchise. The pros include:
- Lower risk business opportunity: Most of the time, a franchise is a safer bet than a startup. New franchises can be riskier, as the data isn’t there to back them up. With due diligence and proper research, you can determine whether a franchise if safe.
- Small amount of time to start: Some franchises, known as turnkey operations, allow you to purchase the franchise agreement, unlock the doors and start your business. (This is a slight simplification of the process, of course.) If you’re eager to start, a franchise can allow you to start operating much faster than a traditional startup in some cases.
- Large support system: If you buy into an established franchise, you can tap into other owners in that franchise. These franchisees will likely have the know how that Google lacks, acting as a great support system during your journey.
- Established audience: The previously mentioned royalty fees also double as advertising fees, as you’re essentially buying a household name when you buy into a franchise. This can help you out of the gate, as franchises have an established audience already so there’s no need to build a customer base from scratch.
While there are a lot of perks to owning a franchise, there are also some downsides. The cons of owning a franchise include:
- Large investment: Both the initial investment and total investment can be high with a franchise. Coupled with the ongoing royalty fees, you can be looking at a huge sum of money that can take years to recoup.
- Binding contracts: Franchises always come with a contract, which can require you to operate the franchise for anywhere from several to upwards of 20 years in some cases. These contracts are generally difficult to get out of and can lead to extensive legal battles or fees if broken.
- High price for materials: Along with binding contracts, many franchises have certified suppliers for required materials that need to be used by any franchisees. These materials are necessary for operation and must be purchased through these approved vendors. These suppliers can sometimes sell their materials above market value, leading to additional costs that could have been avoided if the business were independent.
Franchises aren’t perfect, but for those willing to put in the hard work and without a need for immediate profit, the pros can outweigh the cons.
To franchise or not to franchise?
The franchise system isn’t perfect, but it can be a great opportunity for the right person. Do your homework ahead of time and ask yourself if you can handle the ongoing costs and the potential wait before a payoff.
If you’re ready to think about next steps, be sure to read up on how to finance your purchase of a franchise to see if you can make the cost of a franchise accessible to you.