Operating A Franchise Business

The Pros And Cons Of Buying A Franchise

Franchise businesses involve the transfer of rights to market a parent company’s products or services in a given location. In exchange for marketing rights and resources, the franchisee pays various fees and royalties to the franchisor. While many entrepreneurs assume that buying a franchise is a safer bet than launching a brand-new business, the franchise world is not without its challenges. Understanding the pros and cons of buying a franchise can help you make the most informed decision about your business options moving forward.

Pros of Buying a Franchise

Here are five benefits of buying a franchise business as opposed to starting a new company on your own:

1. Established Reputation

Want to give your new company the best shot at success? With a franchise business, you can benefit from the presence of an existing brand and market for your products and services. Because each franchise produces goods in a standardized way, customers know what to expect based on their past experiences. Additionally, because you may not have to devote any time and resources to marketing, you can focus more on what matters: running your business.

2. Training and Support

Even the savviest entrepreneurs have gaps in their skillsets. If you’re less experienced at running a business, you can benefit from the training and support offered by the parent company. Along with monetary assistance, the franchisor may provide the franchisee with classroom and onsite training in operating procedures, marketing and even computer systems. By going the franchise route, entrepreneurs can hone their management skills while giving their businesses the best chance at succeeding.

3. Affordable Inventory

It’s no secret that the small business owner often has less leverage than bigger players. But when you open a franchise, you can take advantage of the parent company’s purchasing power to get discounts on all your supplies. Keeping costs low also helps ensure that you stay competitive in the marketplace, which is something independent businesses will have a hard time accomplishing.

4. Advertising Budget

Marketing costs can be a serious burden for the bootstrapped new business owner. As a franchisee, you will benefit from the brand equity and advertising campaigns of the parent company. Additionally, by combining their marketing budgets, franchises once again gain a serious advantage over independent business owners.

5. Lower Risk

Need a little financial assistance to realize your dream of business ownership? With studies suggesting that franchises are 2.5-times likelier to succeed than independent businesses, banks are often more willing to loan money to aspiring franchisees. For this reason, opening a franchise can be a more realistic proposition for the new entrepreneur.

Cons of Buying a Franchise

Despite the many advantages of launching a franchise business, the option is not without its drawbacks. Here are five of the most common downsides of franchise ownership:

1. Reputation Risks

While most franchisees benefit from the established reputation of the parent company, it’s important to remember that not all press is positive. In some cases, the negative reputation of one franchise can have a serious effect on others in the region. Before opening a franchise, take a look at your fellow franchisees and the company as a whole. An abundance of bad press may spell trouble for your franchise in the future. On top of this, you really have no control over what the parent company or other franchisees do. A bad manager at one location could negatively affect your location as well.

2. Lack of Freedom

Although having the support and guidance of the franchisor can be incredibly valuable, in some cases franchisees may feel stymied by the lack of freedom. Not only does the franchisor set guidelines regarding inventory and prices, but they may also determine what hours you work and even which employees you hire. If you prefer to make all the decisions in your workplace, you may have a difficult time in the franchise world.

3. High Fees

As a franchisee, you probably expect to pay a substantial franchise fee before opening your business. However, you may not realize that royalty fees can take a serious chunk out of your monthly profits. According to a recent article, franchise royalty costs typically range from 4 to 6%, but they may rise as high as 50% for some companies. Know what royalty fees to expect early on to avoid unpleasant and expensive surprises down the line.

4. Becoming Dependent

As a new business owner, it’s reassuring to know that the franchisor is around to provide support and resources. However, support does not mean they will do the work for you. As a business owner and manager, you must not become dependent on your parent company. Make sure to communicate effectively and ask for help when you need it, but do so in a way that helps you become better at your job. On the other side, just because the parent company is there to help doesn’t mean they will always do so in a timely manner. Lack of regular communication can be a serious burden for new business owners, who may end up feeling like they’re left in the dark.

5. Termination Clauses

While starting an independent business can be intimidating, the franchisor generally retains all rights to the company. One of the downsides of opening a franchise is that the franchisor can choose to activate the termination clause if unhappy with your performance. In this case, the franchisor can shut down your business and transfer ownership to someone else.

Choosing the Best Business Option for You

While the lower risk and superior resources associated with franchise ventures can be a huge boon for an entrepreneur, franchisees may find themselves burdened by a lack of freedom to operate the way they want. Consider all the pros and cons of franchise ownership to be sure you are making the best decision.

Chapter 7.
6 Big Red Flags To Avoid When Buying A Franchise 4 min read
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.