In the United States, buying a franchise business is an extremely popular choice for starting a business, with over 800,000 franchises existing as of 2017. A lot of people choose to purchase a franchise because they believe it is a guaranteed plan for success. And while there are a number of advantages to franchising that may help you to succeed more easily with a franchise than when you create your own business from scratch, there are a number of disadvantages that you must consider before you make the decision to start a franchise.
Advantages of Franchising
There are a number of advantages to owning a franchise, and likely the most popular reason for owning a franchise is that it has a lower failure rate than other business start-ups. If you invest in a franchise, you are investing in a business concept that has already been successfully established in other locations. Therefore, it’s no surprise that, statistically, franchising has a much higher success rate than untested, new business start-ups. For an independent business that is started from scratch, there is typically a seventy to eighty percent chance the business will not last through its first few years. On the other hand, franchisees typically have a success rate of around eighty percent over that same time period. Much of the success comes from the fact that franchises typically have name recognition on a national level and, therefore, customers already know and like a franchisee’s product.
Another huge advantage for many franchisees is the baked in support that comes along with a franchise. For most franchises, support starting the business and running it afterward is part of the deal with the franchisor. In some situations that can include everything from equipment and inventory to training and instruction. Many franchise opportunities offer ongoing assistance to franchisees that might include marketing assistance and management training. Additionally, whenever the national parent company completes advertising campaigns, local franchisees reap those benefits without spending additional funds.
Franchisees are often able to get better prices on supplies and equipment than a traditional business startup because a franchise can use the buying power of other franchisees or the parent company and benefit from bulk buying. As a result, franchisees often realize a reduced cost of doing business over an independent business.
Proven profitability is another huge advantage to choosing a franchise. For some of the most well-known franchises, huge profits can be made. While well-proven franchise concepts can be much more expensive investments initially, the opportunity for high profits often makes the initial expense well worth bearing.
Disadvantages of a Franchise
While the turnkey aspect of many franchises makes them a tremendous business opportunity, there are also many disadvantages of a franchise. The primary disadvantage that many franchisees face is the fact that a franchise is not fully independent. A franchisee often is faced with strict guidelines from the franchisor that must be followed. Some franchisors exert a high amount of control over franchisees, which makes a franchise much less independent than other types of businesses. Franchises often do not have control over many key areas of the business, which may include operating hours, location, pricing of the product or service offered, signage and branding, suppliers or vendors, resale terms, and training practices. As a result, franchisees may not be able to respond to local conditions and trends as easily as independent businesses and may often times have more of a corporate feel due to the lack of control.
Another significant disadvantage is the overall costs. Because many franchises are turnkey operations, the upfront cost may be much higher than starting an independent business offering the same type of products or services. Additionally, unlike independent businesses, most franchisees are obligated to pay a franchise fee or monthly royalties to the franchisor or may be required to share in the cost of national advertising, while also being required to pay a franchise tax in some states.
Some franchises also suffer from a lack of support after initial startup. In those situations, everything after the initial startup is left to the individual franchisee. That arrangement can be difficult, especially when there are strict guidelines to follow, but no training or support to help the franchisee accomplish that.
Additionally, not all franchises are equal, and many people may take the risk of buying an inexpensive or little-known franchise in order to save money and get started with a business quickly. However, those types of franchises are often a huge gamble because the risks are higher. Just because a business meets the franchise definition does not mean it has a loyal customer base already established or that success is guaranteed. Typically in those situations, the franchisor’s only interest is selling more franchises and does not offer the support, training, or advertising of larger, more well-known franchises. As a result, those types of franchises often do not see the same level of profitability.
How Do I Start a Franchise?
While the franchising process can vary from franchise to franchise, most franchise ownership opportunities begin with filling out a franchise application with the franchisor. Franchisors use the application process to screen potential franchisees to ensure they are a good fit for the company. The franchise application process can often be long and require the franchisee to disclose large amounts of personal information, much of which will be surrounding the franchisee’s financial health and viability. It is important to most franchisors that the franchisees be in a good place financially so that the franchise can be successful and is able to survive the hurdles that any business can face in its early years.
Following the initial application, most franchisors will also conduct an interview or series of interviews with potential franchisees. A franchisee should think of this process just like a job interview. The franchisor will want to see if you are a good fit for the working relationship that will exist between the franchisor and franchisee and will also want to ensure that the potential franchisee has shown sufficient commitment, interest, and suitability for the franchise.
Once you have passed the application and interview stages, it is time to negotiate the franchise contract. This agreement will lay out the rights and obligations of the franchisor and the franchise. It is important to utilize the services of a skilled attorney when reviewing your potential franchise contract. Terms and conditions of the agreement will govern how you run your business and will likely have a huge impact of how much money you put in your pocket at the end of the day for years to come. Like any agreement, there may be some areas where you can negotiate change and others where it is a “take it or leave it” type of term. It is a good rule of thumb to ensure that any promises or statements from the franchisor that you are relying on or counting on to make your business successful are contained in writing in the franchise agreement.
Franchises are some of the most recognizable and successful business names in the United States today. However, not all franchises are created equally. Be sure to work with an experienced attorney to discuss and carefully consider all the franchise advantages and disadvantages before you sign any agreement.