Pros and Cons of Buying a Franchise
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Starting a business from scratch takes time and money, and even after you’ve developed your business model, it may take years of adjustments before it becomes profitable. Buying a business can be a smart decision since there’s already a profitable business model in place, as well as a customer base and brand reputation.
If you’re thinking about buying a business, consider a franchise. This list of pros and cons of buying a franchise will help you decide if it’s the right move for you.
- Proven business formula. When you acquire a franchise, you’ll have access to their proven business formula and their operating system. For this reason, acquiring a franchise is less risky than starting your own business, and takes less work to get it up and running.
- Ongoing support and training. Franchisors provide ongoing support and training on all facets of the business, including operations, sales, customer service, marketing, purchasing and software and technology. Some franchisors offer comprehensive training programs, such as McDonald’s. The fast food company’s franchisee training program includes a one week course at their corporate headquarters, 9-18 months of training in a restaurant near you and ongoing seminars, conferences, and one-on-one training sessions.
- Brand recognition. When acquiring a franchise, you’ll reap the benefits of your franchisor’s reputation, which may help you attract more customers in a shorter period of time.
- Trademarks, logos and marketing plans. Many franchisors want consistent branding for their company, so they will have trademarks and logos for you to use, and proven marketing plans already laid out for you to follow.
- Lower inventory prices. Franchisors often purchase inventory and equipment for their franchisees in bulk, giving you the benefit of a lower price point. Small businesses just starting out are often not able to obtain discounts on inventory and equipment, and therefore have trouble competing on price.
- Loss of absolute control. As a franchisee, you’ll have specific rules you must adhere to. Your franchisor may have strict operating procedures for you to follow, inventory you must carry and they may require you follow their marketing plan.
- Fees. When signing your franchise agreement, you will pay an initial fee, and in many cases, this can be a large sum. In addition to this start-up fee, you’ll pay royalty fees on a regular basis, which can be weekly, monthly, quarterly or annually. Your franchisor may also charge other fees, like advertising fees and real estate fees.
- Reputation out of your control. While a brand name can help draw customers into your business, any press the brand receives can affect your own bottom line, for better or worse. For example, when Chick-fil-A’s Chief Operating Officer made public comments opposing same-sex marriage in 2012, activists boycotted the restaurant franchisees in response.
- Risk of poor support. While your franchisor should provide adequate training, ongoing support and help you secure a successful location, there is a risk that your franchisor could fall short on these goals, leaving you with a struggling business.
What should I know about a prospective franchisor?
Before jumping into an agreement with a franchisor, there is some information you must obtain:
- The financial statement(s) of the franchisor. Note: don't rely too much on "pro forma" financial statements. These statements are estimates provided in advance regarding future prospects.
- Copies of profit and loss statements on franchise locations that you select.
- Whether there are any franchisee lawsuits pending against the franchisor.
You also want to be sure to conduct due diligence interviews with other franchisees. Find out what kind of training and support they received from the franchisor, and any successes or challenges they experienced along the way.
Franchising Your Business
If you’re planning to become the franchisor of your own business (and licensing others to become your franchisees), there are other pros and cons to consider:
- Expansion capital. Franchising is a good way to obtain expansion capital with a low capital investment.
- Geographic expansion. Franchisees can spread your business far and wide, and quickly.
- No employee-related costs and issues. Since your franchisees are not employees, you will not be required to provide worker’s compensation insurance or health insurance or settle human resources disputes.
- Motivated operators. Since franchisees have invested their own livelihood into the franchise, they tend to be more motivated and dedicated than employees.
- Loss of absolute control. Though you will have a franchise agreement and may provide a manual for your franchisees to follow, you are still handing over your business’ reputation to someone else. You will also be required to comply with state and federal franchising laws.
- Risk of unprofitable or difficult franchisees. If a franchise is unprofitable, that cuts into your own profits. If a franchisee proves to be difficult, their franchise may end up being more of a hassle than they’re worth.
- Upfront costs. It will cost time and money to draw up your franchise agreement and develop your operations manual, training manual, and marketing plan. You may also choose to develop a training program, which will require ongoing support to implement.
If buying a business or franchise is in line with your business goals, get started by making a list of businesses you would like to own and begin your business plan now.