If you like the idea of running your own business, then owning a franchise may seem like a great idea. With a number of industries offering franchising opportunities, it is an easy way to represent a product or service that you’re passionate about. Quick service restaurants might lead in the sheer number of franchising opportunities that are available, but everything from housekeeping to hardware has an opportunity to franchise.
More than 2,500 companies are offering this type of opportunity. Here are the franchising advantages and disadvantages to consider before jumping in with an investment into one of them.
The Advantages of Franchising
1. You get to join an established brand.
People are familiar with the brands of a franchise, which eliminates the need to build your own brand. You also gain access to a specific customer base which is familiar with the products or services you’ll be selling. Franchising gives you customers who are instantly loyal to you.
2. You receive access to best practices.
You won’t be wasting money trying to figure out the best way to get stuff done for the lowest possible price. Companies offer franchisees a list of the best practices they’ve already developed and they will train each investor in those best practices as well. This helps entrepreneurs save money over the long-term while it promotes consistency within the brand.
3. You still get to be your own boss.
Although you’ll report to the home company, the business you’re running is 100% your own. This means you get to be in control of your fate. You can expand if you wish, stay in just one profitable location, and work the number of hours that you wish to work to build your local presence.
4. Innovation is done for you.
One of the biggest expenses an entrepreneur faces is the cost of innovation. You need new products or new ways of providing a service to keep people interested in your brand. This is something the home company will do for you. Many home companies will also allow franchisees to test local products or services that may perform well in their market only to expand brand offerings.
5. There is a reduced investment risk.
Because you’re starting a business within an established brand, you have less risk that you’re assuming than an entrepreneur who has to start from scratch.
The Disadvantages of Franchising
1. The upfront costs of a franchise can be enormous.
You’ll have to pay a franchise fee to gain access to a brand and it’s vendors and customers. This fee is often $20,000 or more. There will also be start-up costs that can exceed $100,000 for most locations. You’ll also have to meet specific brand requirements during your start-up process, attend franchisee training at your own cost, and develop your own staff. It’s not unusual for a franchisee to be out $250,000 before they achieve their grand opening.
2. A home company can restrict who can become a franchisee.
Net worth restrictions are common in franchising. Before you’ll even be considered as a franchisee, you may have to prove a specific net worth minimum and potentially show how much cash you can have on-hand at a moment’s notice. Fail those requirements and you will not be granted a franchise.
3. You’re going to keep paying the home company.
Most franchises require royalty payments to be made. Some are based on your sales, such as 4% of your general take. Others require a flat fee to be paid periodically no matter how many sales you’ve made. This will limit your profitability, especially in the early days of your business.
4. You can get locked into a non-profitable long-term contract.
The main disadvantage with franchising is that you’re locked into a system that requires you to use a home company’s equipment, contracts, systems, and rules. If that setup isn’t profitable, then you’re stuck in a contract that could be 10-20 years in length and lose money the entire time. There is limited creativity, limited flexibility, and all of the risk is on you.
5. You’re dependent on other franchisees.
What one franchise does will affect your franchise. It’s great when this is a positive reaction, but negative reactions happen all of the time as well.
Franchising can be very rewarding. It can also be financially devastating. This is why performing your due diligence on any franchising opportunity before investing into it is an essential step for every entrepreneur. Use the franchising advantages and disadvantages to make sure the brand you’re thinking about has a solid reputation, has proven returns, and can help you build your own business effectively.