The Pros And Cons Of Buying A Franchise

Among the types of businesses that you can purchase are franchise operations. Some companies increase the number of their locations by selling replicas, or franchises, of their business. 

When you purchase a franchise, you buy the local rights within a specified geographic area to sell the company’s products or services under the company’s name and to use the company’s system of operation. In addition to an upfront franchisee fee, franchisers typically charge an ongoing royalty (percentage of sales).

As a consumer, you’ve likely done business with franchises. Franchising is a huge part of the business world. Companies that franchise — such as Chick-fil-A, McDonald’s, H&R Block, Subway, Hertz, and Supercuts — abound in many business categories. 

Purchasing a good franchise can be more expensive in upfront dollars but can also be a relatively safer ticket into the world of small-business ownership. In the next sections, we cover the pros and cons of buying a franchise.

The Pros Of Buying A Franchise

Unlike when you buy other businesses, you don’t buy an existing enterprise when you purchase a franchise. Although the parent company should have a track record and multiple locations with customers, you start from scratch when you purchase a new franchise (unless you purchase an existing franchise directly from its owners). As the proud owner of a new franchise, you don’t have customers. Just as you’d have to do with any new business, you must recruit your customers.

So why would you want to pay a chunk of money to buy a business without getting any customers in the deal? Actually, you should consider purchasing a good franchise for the same reasons that you’d purchase any other solid, established business. A company that has been in business for a number of years and has successful franchisees proves that there’s a demand for the company’s products and services and that its system for providing those products and services works. 

The company has worked out the bugs, developed marketing programs that work, established a brand, and (you hope) solved common problems. As a franchise owner, you benefit from and share in the experience that the parent company has gained over the years.

Franchises offer two additional advantages that most other small businesses don’t:

1. Skip the startup phase

The most difficult part of starting a business is creating a business plan, conducting market research, creating a minimum viable product, testing it, and then scaling (if the testing goes well). Franchises help you skip this section: The system has already been tested and proven to work. All you have to do is apply it to your market.

2. Brand-name recognition

A larger and successful franchise company has brand-name recognition. In other words, consumers recognize the company name and may be more inclined to purchase its products and services. Or stated another way, the franchiser has already done the marketing and public relations. When you purchase the franchise, you’re buying into the fruits of those efforts.

3. Centralized purchasing 

A franchise offers centralized purchasing advantages. As you’d hope and expect from a corporation made up of so many locations, the franchisor can buy supplies and accessories at low prices. 

Such volume-purchasing generally leads to bigger discounts for customers and bigger profit margins for franchise holders. In addition to possibly saving franchisees money on supplies, the parent company can take the hassle out of figuring out where and how to purchase supplies.

4. Help With Marketing And Advertising

You may need to invest some time and resources in marketing and advertising (more on that next), but the franchises themselves will promote your business via nationwide campaigns that are broadcast on TV, radio, and online.

You’ll also receive input and assistance from the franchise on how to craft and execute your own campaigns. The plan may include a market analysis, strategy, sales forecast, and budget, depending on their size and resources.

5. Training Program

Franchises are successful because they are easily replicable and train their employees in how to run a business in every location. Their training helps new franchisees get up to speed on how things work, such as opening procedures, daily operations, using point-of-sale software, and more.

The Cons Of Buying A Franchise

Franchises aren’t for everyone. As with purchasing any other small business, pitfalls abound in buying franchises. Some common problems that you need to watch for include the following:

You may not be the franchise type

When you buy a franchise, you buy into a system that the franchiser has created for you. People who like structure and established rules and systems more easily adapt to the franchise life. But if you’re the creative and free-wheeling sort (that is, the typical entrepreneur) who likes to experiment and change things to keep life interesting, you’d probably be an unhappy franchisee.

Unlike starting your own business in which you may get into the game without investing a lot of time and money, buying a franchise business that ends up not being what you want can be a more expensive learning experience. For example, you may discover that you don’t like being responsible for hiring, training, and evaluating entry-level employees running a fast-food franchise.

You’re required to buy overpriced supplies

Centralized, bulk purchasing through the corporate headquarters is supposed to save franchisees time and money on supplies and other expenditures. Some franchisers, however, attempt to make big profit margins by putting large markups on the proprietary items that they contractually obligate franchisees to buy from them.

The franchise may be unproven

One of the problems with buying a franchise is that you may not be buying an ongoing, established business complete with customers. If the concept has not stood the test of time and survived the experiences of other franchisees, you don’t want to be a guinea pig as an early franchisee. 

Plus, some franchisers are more interested in simply selling franchises to collect the upfront franchise money. Reputable franchisers want to help their franchisees succeed so that they can collect an ongoing royalty from the franchisees’ sales.

The franchise may be a pyramid scheme

Unscrupulous, short-term-focused business owners sometimes attempt to franchise their business and sell as many franchises as quickly as possible. Some even have their franchisees sell franchises and share the loot with them. 

Everything becomes focused on selling franchises rather than operating a business that sells a product or service intended to satisfy customers. In rare cases, franchisers engage in fraud and sell next to nothing, except the false hope of getting rich quick. (See the next section for more on these schemes.)

Most franchises don’t provide financing 

Franchises typically do not provide financing, so franchisees will have to tap their savings or find some other source of financing (for example, a small business loan). Franchisees are therefore on their own.

To support their franchisees, some franchises, such as Lawn Doctor (which provides lawn and turf treatment services), provide financing for franchise fees, startup costs, inventories, and equipment. In these situations, franchisees will probably have to pledge a portion of their personal assets as collateral, but at least they will not have to dip into their bank accounts or deplete their retirement funds to start their business.

How Much Franchise Owners Make

Franchise Business Review reports that the average franchise owner earns about $80,000 per year. Franchise revenue is affected by many factors, such as neighborhood demographics and traffic. Franchise owners earn an average of $50,000 per year, while 7% earn over $250,000. This is according to the same study.

Final Words

Franchise ownership is a serious decision that should not be taken lightly. Learn as much as you can about the company, its products, and the city or town where you are planning on setting up shop before you purchase a franchise.

It is important to know all the pitfalls of franchise ownership before you sign up for the job, even with a great product and a great location.

Buying a Franchise FAQs

What Should You Do Before Buying a Franchise?

The first step is to do thorough research. Understand the costs and fees associated with the business by reading the franchise disclosure statement and marketing materials. The franchisor’s assistance to struggling franchises and the rate of franchise turnover should also be considered. Consider meeting with other franchise owners to learn about their experiences.

How Can Buying a Franchise Save You Money?

By buying a franchise, you can skip some of the early stages of business development, such as creating a business plan, branding, and conducting market research. As a franchisee, you can start your company with a market-tested product that consumers are already familiar with.

What Are the Most Popular Franchises?

According to FranchiseDirect, McDonald’s is the most popular franchise in 2021, followed by KFC and Burger King. Seven-Eleven, Ace Hardware, and Century 21 were the most popular franchises outside of fast food.

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