September 3, 2021 | 7-minute read (1349 words)
Many would-be entrepreneurs see franchising as a method to start a business without having to start from scratch. The choice to buy a franchise, on the other hand, should not be taken hastily. The notion that franchises are less likely to fail than other businesses is debunked.
Even while purchasing a franchise is less expensive than starting a firm from ground zero, it still necessitates a substantial financial commitment. Furthermore, running a franchise firm requires a great deal of effort, and you must be willing to manage your new business according to someone else's standards. A franchise is a commercial and legal connection between a franchisor (a company's owner) and a franchisee (a person who starts a franchise/branch utilizing the company's business model and trademarks). Remember that the franchisee is the one who sells the franchisor's goods and/or services.
Check out some of the advantages and drawbacks of purchasing a franchise to help you make an informed decision.
The benefits of purchasing a franchise
Most franchises come with the following perks, regardless of the type of franchise, from fast food and hotels to automobiles and hair salons:
It's possible to skip the startup stage: One of the most significant benefits of purchasing a franchise is avoiding the most challenging aspects of starting a business, such as writing a business plan, conducting market research, developing a minimum viable product, testing it, and eventually raising funds for the business, either through a bank loan or a venture capitalist, which can be the most challenging hurdle for many entrepreneurs. However, with a franchise model, you may bypass all of these stages because the business model has already been tested and proved to operate, and obtaining financing is much easier.
Training and assistance are available: Franchises are usually influential because their business models are simple to duplicate and follow, involving franchisors teaching partners and staff at all locations how the business operates and should be performed.
Daily operations, varied opening processes, point-of-sale software and other in-house technologies are generally included, along with access to professional development programs. Midas Auto Repair, for example, provides continuing industry training in diagnostics, maintenance, and wheel alignment, as well as assistance with business management, marketing, and customer relations.
Finding your initial clients, which requires a substantial marketing and branding effort, is one of the most challenging elements of launching a new business. A franchise comes with a well-known and trustworthy brand name. For example, customers know exactly what they will receive when they go into a Ford dealership or a Burger King location.
A franchise provides you access to a well-established, well-known, and devoted customer base, as well as a prospective workforce. It may also help you go on the fast track to profitability by bringing in clients and potential workers straight away.
Bonuses in marketing and advertising:
One of the most effective methods to spend money is on marketing and advertising. While you may have to devote some time and money to your marketing and advertising efforts as a franchisee, the parent company will inevitably promote your business through countrywide initiatives, including television, radio, and internet ads.
In addition, the franchisor will provide you with important advice and assistance on how to create and implement efficient marketing strategies of your own. They may also give a marketing strategy, which would involve market research, tactics, sales forecasts, and budgets.
Buying a franchise gets you to access to the franchise system's advantages. Because of your franchisor's enhanced buying power, you have access to supplies at a cheaper cost because of their long-standing and deep-rooted ties with vendors. They may also purchase vast quantities of goods and equipment on your behalf, allowing you to obtain these assets at a lower rate.
Financing is easier to come by:
Raising funds is something that all entrepreneurs must do, whether they're establishing a firm from the ground up or purchasing a franchise, and getting that money is never easy. For starters, Small Business Administration loans are the gold standard in business loans for entrepreneurs wanting to consolidate high-interest debt, purchase equipment, hire employees, and more; but, you must fulfill strict eligibility standards to qualify.
With the franchise company concept, obtaining an SBA loan is relatively more straightforward since the SBA allocates a percentage of its loan authorization exclusively for franchise businesses. However, before applying, be sure to check the SBA Franchise Directory to see if the franchise you want to buy is listed there.
Resources for real estate:
Big franchisors are generally extremely resourceful, owing to their long experience in the industry. They can assist you in finding a fantastic site for your franchise. Many of them also have their own real estate divisions, while others have ties to large commercial real estate firms. This benefits them as well because the more money you make, the more royalties they receive.
The disadvantages of purchasing a franchise
The franchise business model isn't without its drawbacks. Here are some of the most commonly cited pitfalls.
High startup costs: A franchise is often a capital-intensive business, and the cost of purchasing a franchise might be more than the cost of establishing a business from the ground up. To use their brand and open a store, you must pay an upfront fee to the franchisor and recurring royalty payments (a percentage of total gross sales). This price can be in the six-figure or even seven-figure range. You may also be needed to have a certain amount of liquid cash on hand and a high credit score. So choose your franchise wisely because the more significant the brand, the more money you'll need to invest.
Problems with reputation management: Regardless of how popular your franchise is, when anything goes wrong at the parent company, it may significantly negatively impact all franchisees. For example, if a national scandal occurs, your firm may be affected as well. For instance, after Subway's pitchman Jared Fogle was jailed in 2015, shortly after the tragic death of business co-founder Fred DeLuca, the number of franchisees dropped by 1,221 between 2015 and 2017.
The public backlash caused so much harm to the Subway brand that several franchises were forced to close as a result. According to Techonomic, a food industry research organization, the brand's domestic sales have been declining for four years as competitors continue to steal consumers from various Subway locations.
Restrictions on flexibility: You want to be your own boss; therefore, you're starting a business. If you own a franchise, though, this isn't necessarily the case. Although you will have some control over how you manage your business, you will be required to follow the franchise's rules, regulations, system operations, and instructions for the most part. It doesn't matter if you've discovered a better and more efficient way of doing business if the franchisor doesn't agree. If you make significant changes to the company's management, you may face considerable penalties, or your franchise agreement may be canceled.
Some franchisors also have a history of micromanaging their franchisees. They may have a voice on the physical location, hours of operation, signage, layout, price, and resale terms of the business, among other things, depending on the contract.
Contracts can be tough to negotiate: When you get a franchise, you will be required to sign a contract with the franchisor that spells out everything you can and can't do as a franchisee. If you fail to do even one of these things, you may lose your franchise entirely. Furthermore, if you wish to close your franchise, you may find the procedure exceedingly tricky. Also, after the contract expires, the franchisor has the option of not renewing it — and you have the option of not renewing it as well.
In the end, owning a franchise may be a good idea for some people and a poor idea for others. Before you take the leap, consider the advantages and disadvantages, conduct your own study, and get legal counsel. Before making a final decision, consult the Federal Trade Commission's Bureau of Consumer Protection's Business Center's “Buying a Franchise: A Consumer Guide.”