Small Business Franchising
Franchising: Pros and ConsThere may come a day when you’ve grown weary of the corporate grind or you’re looking at the possibility of being put out by your employer due to budget cuts and downsizing. Maybe you just don’t like your job anymore, but you’ve got some capital to play with and you want to venture out on your own.
Whatever your underlying motivation is, if you have strong financial backing or a way to obtain a significant financial backing, and you’ve got the drive and determination to start your own business; buying a franchise is a consideration in these situations. With the idea of buying a franchise in mind, what exactly are the pros and cons of this investment?
Established Business PlanWhen buying a franchise, you’re essentially buying a business plan with a proven track record of profitability. There’s no real guesswork involved with this option, you’ll likely receive explicit details on what products and/or equipment to buy, which company to buy the products and equipment from, how to operate your business, methods you should use to train your employees and so on. In many cases when buying a franchise you’re receiving a nuts and bolts, step by step outline on how to run your business by the franchiser who has already established a profitable business model. It should be noted that even using the franchise model, there is an inherent risk of financial loss; only this risk is usually lower than if you were setting up a business on your own.
Name RecognitionFranchises are the offspring of an established company. A company that likely has spent millions of dollars in not only branding their business name, but in managing and protecting the reputation of that business name. When you purchase a franchise, you are miles ahead of non-franchised businesses because the people in your area already equate the business name with a certain product or service, and hopefully a good reputation as well.
Buying into a “known” company will also save countless dollars that are normally needed to spread the word about your business and to acquire new customers as when you’re buying a franchise; you’re buying rights to use the name of and offer the services of an already established company.
Continued Market ResearchIn order for a parent company to be successful when employing the franchise business model, the parent company must know the ins and outs of the market they are catering to. From pricing to competition and even seasonal variances, franchisors are typically on top of things when it comes to marketing aspects of the products that they offer and the particular needs of the target market. Because of this, franchisees benefit from this market research without having to spend a lot of money by performing the market research themselves.
Reasons not to Purchase a FranchiseJust as there are benefits to purchasing a franchise, there are some things that might cause issue with some would be franchise owners. These “cons”, if you will, might be deal breakers for the option of purchasing a franchise.
Loss of FreedomRunning a franchise can be similar to being a manager for a large corporation. While depending on the franchisor, there may be a bit of freedom allowed by way of day to day operations and the way some transactions are handled; creativity is largely stifled and the ability to “do your own thing” that independent business owners enjoy is almost lost when you purchase a franchise. If you want to have the freedom to run your business in the way that you see fit, then buying a franchise may not be the best decision for you.
RoyaltiesLike clockwork, every year you’ll have to pay franchising fees to the franchisor that goes towards advertising and continued support. Of course, these royalty payments may more than pay for themselves, but before you sign on the dotted line you should always find out exactly what the franchisor is supplying in your area in exchange for the royalty fees.
High Startup CostsDepending on the brand name you will be purchasing into, the startup costs can be astronomically high. In some franchises, you will need to dish out anywhere from $100,000 to several million dollars or more for the rights to use a brand name alone, and that doesn’t even begin to cover the costs of the building, equipment, insurance, etc. Unless you’re looking to purchase a franchise from a company with a less established name, or you have a significant amount of financial backing; you should be certain that the franchise model is something that you want to pursue considering the hefty initial investment.
Ultimately, whether you decide to purchase a franchise is up to you. This decision is not a small one, and before you agree to anything that’s binding – you really need to weigh out the pros and cons of buying into a franchise.