Franchising is another great path to business ownership, offering a great new opportunity somewhere in the middle of a new business start-up and the purchase of an existing business. Here are the advantages and disadvantages you could experience when buying a franchise.
Advantages of Buying a Franchise
The business is already formed - the planning is done
Reduced risk - the concept has been tested and proven
Turn-Key Operation – the franchisor helps you find and choose a location, hire employees, market yourself, etc…
Standardized Operating Procedures – Training programs in place for all employees from entry level to upper management
Collective Buying Power – 90% of your supplies, inventory, uniforms, etc…are purchased through your franchisor who is buying in bulk and passing savings on to you
Research and Development – the franchisor decides when to introduce new product lines or offer promotional discounts while you focus on operating the business
Supervision and Consulting – The franchisor provides training and supervision while you’re getting established.
The franchisor wants you to succeed; he gets paid royalties based on your success. A good franchisee will provide the training and support you need to ensure you will show succeed and generate a good profit.
Disadvantages of Franchising
Loss of Control – You must do everything exactly as you’re told to do it. You are not authorized to change policies and procedures; you cannot decide when to introduce new products or offer promotional discounts. The franchisor makes all the rules and you must follow them; the franchisor is to you as a boss is to an employee.
Binding Contract – You’re all-in! Franchisees do not operate independently; they all do the same thing, the same way. This consistency is most beneficial to the customers as they know what to expect no matter what location of the franchise they visit, no matter what state, county or city. They know that whatever they order will be the same size, prepared the same way, and packaged the same way.
Franchise Problems become Your Problems: If one franchisee in your particular franchise has a problem, for instance, a lawsuit that becomes nationally known. For example, ABC Chicken, in one location, is sued when a lot of people are sick with food poisoning. The news quickly travels across the US and you find your revenues slipping. No one wants to risk going to ABC Chicken; they don’t even consider that this is likely an isolated occurrence.
Cost Associated – The initial franchise fee, which is the cost of your rights to sell their product, can be anywhere from a few thousand to over $1 Million, depending on the franchise. This fee may not cover other start-up costs, operating capital, the upcoming payroll, beginning inventory and more. You also might be required to purchase or lease a certain location; one that is a prime location in your area; therefore, being sold at a high cost. You may be independently responsible to buy signs, fixtures, etc… as well.
When franchises are operating well, everyone does well. When there are problems, all the franchisees can suffer. Though a lot of the risk potential is reduced, there are still possible risks to consider when deciding to buy a franchise.
Bill Bartmann covers the paths to business ownership and the advantages and disadvantages to each. His online course, Billionaire Business Systems, has guided many entrepreneurs to great success in their business ventures.