Running one’s own business is the dream of many entrepreneurs. Franchising often helps to turn this dream into a reality. It can also be a viable business opportunity for investors who want to have a way to make money, but not be involved in the day-to-day operations of a business venture. The pros and cons of franchising are varied and often based on individual needs, so here is a complete look at this type of business opportunity.
The Pros of Franchising
1. There is instant brand recognition for the new business.
Instead of needing to build up a personal brand, there is a better overall brand awareness in a franchising arrangement that can help a community instantly recognize what a business does and what value it brings. Many people find just as much value in the brand name itself than what a company provides. You can get burgers at a lot of places in the US, but people are loyal to brands like Wendy’s, Burger King, or McDonald’s because of the experience. This is ultimately what you’re buying into with a franchise.
2. Most advertising needs are taken care of by the home office.
Franchises can market on their own if they wish, but the main parent company often takes care of this work for them. This might include window clings, TV and radio advertising, or any number of additional media efforts. The goal is to get the general public to recognize the brand and then shop locally with the franchise the business owner owns.
3. There are vendor relationships that already exist.
Franchise owners are able to have access to already existing vendor relationships that allow for easier supply purchasing. The prices are often better because of the size of the franchising relationship, which gives franchise owners a margin advantage as well. The end result is faster deliveries, better prices, and potentially better revenues.
4. Training happens on-site.
Instead of trying to figure out everything on one’s own, franchises offer their franchisees some hands-on training opportunities. There is often an extended training course held at company headquarters, which is then followed up by a week or two of training that occurs on the site of the new franchise. Best practice manuals are distributed to help the learning process so that a consistent experience is provided by all staff.
The Cons of Franchising
1. There’s often a requirement to have high value assets available.
Someone who wants to start a franchising business generally needs to prove their financial worth before being awarded a franchise. This often means meeting net worth requirements, having a certain amount of liquid cash on-hand, and paying a franchise fee that is generally between $10-$50k. If these stipulations don’t get met, then the franchise is not awarded.
2. The fees never stop.
Although instant brand recognition is nice to have, franchise owners are going to be paying for that recognition throughout the life of their contract. Royalties for the rights to use a specific brand and layout design can range from 3-8% for most franchises. Advertising royalties are often part of the fees as well, which may also range from 3-8%. This royalty may come from gross revenues instead of net revenues, so 16% could be coming off the top.
3. There isn’t always control in what can be sold or provided.
Franchises often control what products can be bought and sold. They’ll also control what services can be provided by their business owners. This means that personal creativity and possible local upsells are discouraged because a consistent brand presence is being emphasized. In some communities, this might mean a franchised business may not have long-term viability.
4. Not every franchise agreement is renewable.
After investing all of the time and money to build a franchise in a local community, the agreement may expire and may not be renewable. Once a franchise agreement expires, all branding must be removed from the business. It can still operate as an independent business and is free from restrictions, but this changes the vendor relationships and limits access to products at times as well.
Franchises Can Be Very Profitable, But Only if There is Support Behind the Brand.
If you’re considering a franchising relationship, then weigh these pros and cons against what supports you will receive from the brand. If there isn’t consistent support available, then that might not be the right opportunity for your next business venture and a different franchising opportunity may make more sense.