There are numerous businesses that consumers engage with on a daily basis that are franchises. Many fast food restaurants are franchises, for example, as are doggy day care facilities, janitorial companies, and even automobile mechanics. If you have a talent and a passion for a specific product, a franchise is an easy way to create a local business. You will have to pay a franchise fee and likely need to pay royalties weekly or monthly, but in return you’ll get instant brand-name recognition.
The pros and cons of owning a franchise are worth considering if you’re looking to create a new business opportunity, so here are some of the key points worth evaluating.
What Are the Pros of Owning a Franchise?
The primary benefit that franchise owners receive is a standardized product that they can present to their local community. Most franchises have architectural plans in place, relationships with vendors, and a message which local consumers already know. There’s no need to build up the recognition of a brand because people already know it. This means that profits can happen from the first moment of a grand opening. Here are the other positive key points to consider.
1. You are given access to a list of best practices immediately.
Almost all franchises require new owners to attend some sort of training in the brand’s best practices before the local business is allowed to open. The best franchises even place new owners into training stores that serve real customers so that the brand’s experience can be witnessed on a first-hand basis. This cost is often built into the franchise fees as well, so the only cost is room and board during the training. In return, the locally owned franchise can begin running effectively right away.
2. Most franchises help with the initial setup process.
From finding a high traffic location to the interior design of the business, franchises have developed best practices through tangible evidence that has been collected at other locations. This frees you up to begin the hiring process right away because you don’t have to worry about whether or not your concepts will test well.
3. Many franchises offer veterans the chance to get involved for a discount.
Franchises offer veterans an incentive to start their own business by discounting or removing franchise fees if military service can be proven. Most discounts are at least 50%, which can be a substantial amount if the initial fee is $25,000. For sole proprietorship franchises, there is a good chance that no franchise fee will apply for branding to be allowed.
4. The costs of a franchise are required to be given upfront.
There are no hidden fees associated with the start of a franchise. In the disclosures that are given to potential owners, every cost must be documented. You always know what percentages you’re going to pay and what kind of renewal terms are going to be available to you. In many franchises, this even applies to the cost of equipment needed to run the franchise and the goods that must be purchased to create products for sale.
5. There may be assistance with problems that come along.
Many franchises send representatives to new locations for the first 2-4 weeks to make sure everything is operating as intended. If problems come up, then they can be quickly solved. Most franchises also offer a dedicated help line to franchise owners so that solutions can be found when there unusual situations that come up. This helps the franchise be able to adapt to changing circumstances without guesswork.
6. There are numerous networking opportunities.
Most franchises have at least a yearly gathering of all their local owners so that everyone can get together, network with each other, and get updates that can help the performance of their business. This is a great chance to expand a personal business footprint, find ways to share resources with other owners in the region, or share local best practices with each other for mutual benefit.
7. Help is often provided for legal matters.
Every business faces a legal challenge at some point in their existence if they can make it past the 5 year hurdle. If you’re on your own, especially as a sole proprietor or general partner, and a legal challenge occurs, then your personal assets are at stake. Being within the umbrella of a franchise often means that help is provided to protect the integrity of the brand so that you can fight of the challenge more easily than if you were on your own.
What Are the Cons of Owning a Franchise?
The primary disadvantage of owning a franchise is the amount of fees that are often involved during the start-up process. Many franchises charge between $25k-$50k for access to the brand name. You’ll also be paying a 3-8% royalty on the sales that are generated, which may come out of gross sales instead of net profits. Advertising royalties of 3-8% may also be required. For a business that is first getting started, those can be hefty mandatory costs to pay because they’re often required whether or not you’re making money.
1. The franchise sets all of the rules.
You don’t have much, if any, say in how the franchise runs their business. Your chosen franchise may decide to disallow assigned territories, which means someone could open up another business just down the road from you and split your business in half. You may be given marketing materials that are mandatory to use that don’t relate well with your community. You get to hire people and maybe set prices, but the rest of the standards are set by the franchise.
2. There are often mandatory wealth requirements.
It is not uncommon for a franchise to require a minimum net worth of at least $100k for a franchise to be awarded. There may also be liquid cash requirements in place that fall outside of personal assets. Some franchises even require an owner to have personal experience within the industry, including management experience, before they’ll award a franchise. That can make it difficult for some people to break into the business.
3. There may be non-competition agreements.
When franchise owners begin training in the best practices of a business, the home organization typically doesn’t like it if those best practices are made public or are used to compete against them. Many franchise offers have a non-competition agreement that may limit the types of business a franchise owner may operate or begin within an industry for several years, even if this opportunity winds up as a failure.
4. You are forced to participate in programs that may not benefit you.
National-level franchises often have a three-tiered marketing approach. They’ll have national and regional campaigns that are consistently running and then create local-level campaigns to help “breathe life” into your business. If you don’t believe the national or regional marketing efforts are effective, there’s no way for a franchise owner to opt out of them. The royalties are going to be paid no matter what.
5. Other franchise owners can negatively impact your business.
Although networking with other franchise owners can be a great way to expand a business footprint, it can also have a very negative effect as well. If one franchise owner is caught in unethical practices or creates bad press for the brand, then this negativity will automatically reflect on your local franchise as well. There’s nothing that can be done to stop this either because of the associations that most customers make with branding.
6. You might be forced to take on clients you don’t want.
When franchises are trade-based, then one of the perks is often client finding. This can be extremely helpful in the first days of a business, but it also means that you don’t have much say as a franchise owner over the contracts that you take. It is not uncommon for a franchise owner to meet someone after a phone or online conversation and decide that the job isn’t right for them, but a right of refusal is not something that franchises offering contract solicitation typically allow. This is especially true for services like plumbing, janitorial, or painting.
7. A hands-off approach is often required.
If you’re a creative person, then the dictations that a franchise demands are probably not for you. There is often no creativity allowed in the presentation of goods or services that are provided by your business when underneath the umbrella of a franchise. Doing so could potentially even revoke franchise status without a refund of the investments already made, which sometimes could be several hundred thousand dollars.
Some entrepreneurs thrive with a franchise, while others find them to be too restrictive. Consider these key points as you weigh the pros and cons of owning a franchise and you’ll be able to come up with a decision that works best for your business needs.