There is an obvious appeal to starting a business by buying a franchise. Whereas starting a business often comes with a lot of unknowns, a franchise is proof of a successful model already in motion.
That doesn’t mean that buying a franchise equals instant and sustained success. In fact, the mythical “statistic” that says that franchises are less likely to fail than other businesses is just that— a myth. Running your own franchise is still hard work, and there are drawbacks to opening a business that requires operating by someone else’s rules.
If you’re exploring the idea of buying a franchise, you should know what you’re getting yourself into. Here’s a rundown of the pros and cons:
You may already have a franchise in mind—a certain type of business that is lacking in your neighborhood, or a company that you admire and want to be a part of by becoming a franchisee. Regardless of what franchise catches your eye, know that many franchises come with the following benefits.
Skipping Startup Stage
The most difficult part of owning a business arguably comes in the startup stage, where you have to write a business plan, conduct market research, create a minimum viable product, test that product, and then scale (if testing goes well, that is). Buying a franchise helps you skip this section: The system has already been tested and proven to work. It’s now up to you to apply their system to your market.
Franchises come preloaded with a name that people know and trust. Getting customers to recognize your brand is an incredibly difficult slog—but a franchise has a name that is recognized nationwide. For customers, there is no doubt what you’ll get when you walk into a Wendy’s or Barry’s Bootcamp. That’s a valuable value add.
A major part of what makes a franchising successful is its easily replicable system, which includes training employees at every location in how business is done. You’ll get help bringing new hires up to speed on how things operate—often with on-site training on opening procedures, daily operations, using point-of-sale software, and more.
Help With Marketing And Advertising
Although you as a franchisee may be required to invest a certain amount of time and resources in marketing and advertising (more on that next), the franchises themselves will promote your business via nationwide campaigns that are broadcast on TV, radio, and online.
You’ll have input and help from the head office on how to craft and execute effective campaigns of your own as well. They may provide, depending on their size and resources, a marketing plan that covers a market analysis, strategy, sales forecast, and budget.
Access To Increased Purchasing Power
One obvious advantage that big businesses have over small businesses is their access to increased buying power. The franchise may buy large amounts of inventory and equipment on behalf of their franchisees, meaning you’ll obtain these important assets at a reduced cost.
Easier Access To Financing
The biggest barrier is, of course, the price tag: The exact costs vary, but some franchise fees are hundreds of thousands of dollars, and overall investment can easily top $1 million. Some may “only” be tens of thousands of dollars, but even that is a sizeable investment for most people. Then there are royalty fees and other startup expenses.
Seeking financing is a common need for business owners regardless of whether they’re starting their own business or buying a franchise, and securing that financing is never easy. SBA loans, in particular, are considered the gold standard in business loans, but they require meeting stringent eligibility requirements.
Because the SBA reserves a portion of their loan allotment specifically for franchises, however, you may have an easier time of qualifying than if you were to seek an SBA microloan for starting up an independent business of your own. Check to see if the franchise you’re interested in buying appears in the SBA Directoryfirst.
The Cons Of Buying A Franchise
Buying a franchise comes with its own set of issues and drawbacks. No business or business model is perfect, so it’s important to know what you’ll have to deal with if you do move ahead on buying one:
Abiding By The Franchise’s Rules
Business owners love being their own boss, but for owners of a franchise location, that’s simply not the case. Though you’ll have some autonomy in how the business operates, for the most part you’ll be required to follow the rules, regulations, system operations, and directives of the franchise. If you’ve identified a more efficient way to conduct business, that may not matter if the company doesn’t agree with you—and you won’t have any recourse, either.
High Startup Costs
As mentioned above, the costs of buying into a franchise are high—in some cases, markedly higher than they would be if you started your own business. The franchise fee alone may be out of your reach, and if it isn’t, it will take up a severe chunk of your liquidity. Even though financing is a possibility, it’s not a guarantee, and that’s often an issue for prospective franchisees.
Ongoing Royalty Payments
In addition to the high costs of entering the franchise space, you’ll also continue to owe your franchise royalty payments for using their name and system, and will have to contribute to marketing and advertising costs at their discretion.
Reputation Management Issues
No matter how well run, efficient, and well-liked your franchise location is, your business is still tied to the national franchise—and any issues that brand runs into affects your business outcomes. If a scandal rocks the national office, or another franchisee gets bad publicity, your business can be affected.
When you agree to buy a franchise, you’ll no doubt sign a contract such as a Franchise Disclosure Agreement, which lists all the things you can and cannot do as a franchisee. Break one of those many requirements and you could lose your business altogether. Or, decide that you don’t want to be in this business anymore, and you’ll find the process of closing up shop much more difficult than if you didn’t sign a contract with a national franchise.
The decision to buy into a franchise comes with many of the same considerations as starting any other business—you’ll need a passion for the business, a business plan, a team, tools that help you stay organized, financing, and much more. But the specifics of what makes franchising a good and bad move is what makes your choice that much more intriguing. Decide if you can live with the cons—and take full advantage of the pros—before you buy a franchise.