Joel Libava
In this post on the pros and cons of owning a franchise business, I’m going to go over the things you need to know about franchising, so you can make a smart decision on becoming you’re own boss. Let’s begin!
For starters, there’s no question that the decision to become the owner of a franchise is a big one.
Franchise ownership can be very, very rewarding. But there are pros and cons to doing so.
That said, know this: The franchise business model is a powerful one. But it’s not perfect.
That’s why I suggest you ignore some of the more common sayings in franchising.
Like these:
“You’re buying a ‘business in a box’ when you buy into a franchise.”
Or
“Owning a franchise means that everything is all set-up for you. You just need to follow the system.”
Or
“Franchisors provide all the support you’ll need to be successful.”
Or
“Buying a franchise…becoming a franchisee, is much less riskier than starting your own business.”
Etc.
Please. Ignore. Those. Sayings.
Especially ones that have to do with franchise risk.
That being said, let’s go into the pros and cons of owning a franchise, so you can make a smart, educated decision on buying a franchise.
What Are The Pros And Cons Of Buying A Franchise
As good as it is, the business model of franchising is not for everybody. There are even some franchises-like E-Cig franchises, that aren’t for everybody. Franchise business ownership certainly has its pros and cons.
If you’re seriously considering owning a franchise, the pros need to outweigh the cons in order for you to buy into a franchise.
Tip: Please remember that you are investing in someone else’s system-someone else’s ideas. The words you need to focus on here; “someone else’s.”
With that in mind, it’s time for me to show you several pros and cons of franchises.
Pros Of Franchise Ownership
Systems
There are business systems in place for you to use. Lots of them. They include things like computer systems, marketing systems, operating systems and more. A franchisors’ business system (s) is the heart and soul of their business. Respect it and use it. That’s what you’re paying for upfront as part of the franchise fee.
Training
You’ll be provided with a formal training program soon after you sign your franchise agreement. Some of your training may come in the form of online modules. Some franchisors have you jump onto their Extranet so you can start learning about the business before you attend a formal training class at franchise headquarters. Call it pre-training. It’s a great way to get into the groove before you fly out to headquarters.
Technology
Technology budgets in franchising have grown over the years. As a franchisee, you’ll benefit greatly from the technology that franchisors have in place these days. Some of this technology is designed to help you manage your customers. Some of it will help you with things like accounting and payroll. Would you like to know how good a franchisors technology is? Before you move forward with buying a franchise, talk to the franchisees. They’re using it every day. Believe me…they’ll tell you if it’s good-or not so good.
Marketing/Advertising
Franchisors have marketing plans and advertising templates all ready to go for you. Having those at your disposal can really help you get your name out quickly. Speaking of getting your name out…
Grand Openings: A lot of franchisors put a lot of energy towards your official grand opening. You should to. You’ll never have another grand opening of your franchise business. Take advantage of everything they have to offer. Take advantage of what buying a franchise can offer.
Marketing your business is an everyday affair. Today’s franchisors have access to companies and tools that can-and do help your franchise business stay top of mind in your local area. in addition, there’s power in numbers when it comes to advertising. 150 franchisees can secure cheaper advertising rates than one single franchise owner…or independent business owner. That’s huge!
Ongoing Support
For the most part, franchisors have terrific ongoing support systems in place. From in-house personnel that man the phones and the central computer systems, to field reps that make in-person support visits, franchise support-great franchise support-can’t be beat when it comes to keeping your business up and running.
Tip: Don’t be shy when you have an issue. Reach out for support. You’re paying for it.
Real Estate Resources
Franchisors tend to have the resources…real estate-wise, needed to help you secure a great location for your franchise business. Some franchisors have formal in-house real estate departments. Others have connections with national commercial real estate companies. Either way, know this: The importance of getting a great location for your franchise business goes both ways. In other words, it’s equally important for the franchisor and the franchisee to secure a great location. The more money a franchisee makes-the more money the franchisor makes in the form of royalties. It’s a win-win.
Franchising: A Franchisee Network
There are other franchise owners who, like you, invested in the opportunity. They have experienced things from the front line, and can help you out with problems that may arise. As a matter of fact, the franchisee network is so important, that if I was authoring the franchise operations manual, I would highlight the fact that there is a network of like-minded franchisees ready and willing (for the most) to assist you. They’re the ones with the answers. They’re the ones who have probably experienced the issues that you’re just beginning to experience. Don’t be shy. Reach out to fellow franchisees and ask them for help and ideas when needed.
That said, I encourage you to watch this short video about using franchisees as a resource.
The Cons Of Owning A Franchise
Franchising isn’t perfect. That’s because humans are involved.
There are some negatives when it comes to franchise ownership.
Franchise Fee
You’ll be required to pay a franchise fee, up-front. This one-time investment (per franchise unit) is the cost of entry. It’s the licensing fee. As you’ll learn when you read the Franchise Disclosure Document (FDD) and the Franchise Agreement, the franchise fee allows you to use all of the franchisors proprietary information-legally.* The franchise fee is normally around $30,000-$50,000 on average. It could be a bit less, and it could be a bit more. But, it’s there and it’s a required payment. That’s a lot of money.
*Learn more about the Franchise Disclosure Document.
Royalties
As a franchisee, you’ll be paying the franchisor a percentage of your gross sales each and every month you’re a franchisee. Percentages vary. I’ve seen food franchise royalties that are 5% and I’ve seen royalties for consulting types of franchises at 12% of sales.
Example: Let’s say your franchise sales are $25,000 per month. If the royalty is 5%, that means the franchisor will collect a check from you for $1250.00. That’s $15,000 a year that goes to the franchisor. Now, double it. If your franchise is doing $50,000 a month in sales, you’re sending in a $2,500 check in each month. That’s $30,000 a year!
Question: is paying a royalty on revenue a con?
Noodle on that.
The Rules
You must follow the franchisors’ rules. There’s really no wiggle room here.
Franchise systems need rules. They need a lot of them. They’re there to keep things uniform. Rules are not put in place to aggravate you.
Why do you think a WHOPPER® Sandwich from Burger King® tastes the same whether it’s prepared in Dallas, Texas or Oxnard, California?
Purchasing
For the most part, you’re required to purchase your products and supplies from your franchisor.
If you’re a Dairy Queen® franchisee, you”’ll be purchasing your ice cream from Dairy Queen headquarters-as it should be. In the past, some franchisees of some franchise systems have banded together to try to change that requirement in order to save some money. Some have even won out, and have been able to purchase things from non-franchisor suppliers. But, don’t count on that happening in the franchise system you’re a part of.
Marketing Fund
In most cases, you’ll be paying a percentage of your gross sales (in addition to the royalties) to the franchisor. Figure 1%-2%. It’s a small number, but it does add up.
As a matter of fact, it really adds up-at least psychologically, if the franchisors’ marketing is average at best. Case in point: My own experience.
When I was a franchisee, I had to pay around $300 a month into the marketing fund. (In my case, I paid a flat fee. It’s not that uncommon.) But, here’s the thing: The franchisors marketing efforts were way below par. Paying them $300 each and every month for pretty much nothing, was one of the straws that finally broke the camels back. Especially since I was doing a better job of franchise marketing than they were.
Tip: Find out ahead of time…way before you sign your franchise agreement and send in the franchise fee, just how good their marketing is. Talk to a dozen or so existing franchisees. Ask them straight-out if they’re getting a good return on their marketing investment.
Selling Your Franchise
If and when you decide to sell your franchise business, you can’t just sell it to anyone. The franchisor needs to approve the buyer. Can you blame them?
Now, you might not care all that much about who it is that ends up buying your business, but your franchisor will…trust me.
It’s Up To You
You now have a good idea of some of the pros and cons of franchise ownership.
It’s important to look at both sides of the coin…in this case, the pros and cons of a franchise.
Especially, with what could end being a sizable investment.
An investment in a franchise business.
Yours.
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