Pepin Valley Consulting The Franchising Specialist
Pros and Cons of Franchising
By Bob Hebert
As with any decision, there are pros and cons to buying a franchise. Franchising can offer an excellent opportunity but only to the right individual in the right circumstances. Are you that individual? Only you can answer that question. To help you decide I’ve listed below the most common pros and cons to owning a franchise
Some of the most common pros are:
- Lower risk: Risk of failure is much lower with a franchise than with starting an independent business. The U.S. Department of Commerce conducted a survey to show the percentage of businesses still operating after five years. They found that 92% of the franchises they surveyed remained in business compared to 23% of independent businesses
- Pre-purchase information: Because the exact model of the store you will be running is up and running elsewhere the potential franchisee can make a more informed decision prior to purchase. The Federal Trade Commission requires franchisors to provide you with a list of current franchisee names and contact information. You will be given ample time to contact these owners to discuss financials, experiences, support issues or anything else you want.
- Brand name: The name that comes with many franchises is already recognizable to consumers, without the owner having to spend a lot of money and time in establishing a brand. Therefore a customer base is already established.
- Marketing: The franchisor can provide input to the franchisee on a local marketing plan saving the owner the expense of hiring a marketing firm or making costly mistakes in a hit or miss attempt to find the right marketing blend. The owner can also benefit from any advertising that the franchisor does at a national level at a fraction of the cost it would take to do it alone.
- Initial support: Training is usually part of the deal. The franchisor offers experience to an owner in such areas as accounting, operational policies and procedures, personnel and business planning. They can also help with site location, leases, build outs and the all important grand opening.
- Ongoing support: Part of the royalties you will pay go for ongoing support for questions and answer on technical matters about your business that as an owner you don’t have the time or resources to do on your own. Help with such things as personnel management, accounting procedures, sales and marketing best practices etc. Also research and development of new products or technology improvements to increase efficiency.
- Obtaining funding: Many times getting financing for a franchise is easier since the franchise name and reputation are recognized by the lenders and many franchisors will assist franchisees in writing a business plan. Therefore, banks are more likely to fund the franchisee.
- Niche market: Franchises cater to consumers' needs. They have already found a niche market that consumers prefer so you don’t have to reinvent the wheel.
Some of the most common cons are:
- Higher start-up costs: Franchises will require an initial franchise fee before you open up your business. This fee is usually anywhere from several thousand to tens of thousands of dollars.
- Royalty payments: Most franchisees make royalty payments to the franchisor based on a percentage of the sales.
- Advertising fees: Most franchisees make ad payments to the franchisor based on a percentage of the sales.
- Lack of Creativity: When you buy a franchise you're buying its business plan. Most franchisors impose price, appearance, operating and design standards. If you are an individual who likes to do things your own way you may find a franchise to restrictive to your tastes.
- Noncompetition clauses: Most franchise agreements have a noncompetition clause (franchisees cannot become independent business owners in a similar business) written into their franchise agreement.
In many ways it comes down to you will pay more for a franchise than a start up. Will the benefits of the franchise offset those expenses?
The franchisor will argue that the initial franchise fee is more than paid back in mistakes that will not be made by the franchisee had he/she gone out on their own to and that royalties and ad fees are used on behalf of the franchisees to support operations, research new products and procedures, promote the brand name recognition and maintain the health of the franchise company. What the franchisee must determine is if the extra fees associated with a franchise are worth the money invested. For more help with that question you can refer to the article Why pay Franchise fees, Royalty fees and Ad fees?