Buying into a franchise is a great way for a novice entrepreneur to get their feet wet, and learn the ropes of running a local business in a specific industry, with a somewhat reduced risk of failure and lots of support and guidance. It’s not for everyone, however, and before making the leap, would-be franchise owners should carefully consider all of the pros and cons, including these:
1) The Brand
Pro: The Power of the Brand
Let’s face it, the main reason for buying into a franchise is the national recognition. When popular franchises like Krispy Kreme and Ikea move into a new territory, there are lines around the block on opening day. Who doesn’t want instant customers? The more popular the franchise, the more you’ll have to pay, of course, but financing will be easier to obtain.
Con: Licensing and Royalty Fees
Instant customers cost money. Expect to fork out around $35,000 or so right off the bat in the form of a franchise fee, plus a percentage of your monthly sales in royalties. Depending on the franchise, licensing fees can range from $20,000 to over $100,000, and royalty fees are generally between 5 and 12 percent.
2) The Plan
Pro: A Blueprint for Success
Think of a franchise as a business-in-a-box. It’s a tried and true (hopefully, if you’ve done your research) formula that someone has spent many years perfecting. It’s been successfully replicated many times over, with tweaks and improvements made along the way. All you have to do is follow the directions — some assembly required.
Con: Little to No Creative License
If you’re the type that doesn’t like to color between the lines, a franchise is not for you. There’s usually very little flexibility in the way a franchise is set up and operated. You’ll likely be given an operations manual as thick as a phone book, detailing everything from the products you must carry and your hours of operation to the uniforms you must wear and even the posters you have on your wall.
3) The Training Program
Pro: Training and Support
Thanks to a formal training program and a dedicated support staff, even a complete novice can open a successful franchise. From online pre-training to formal classroom training at the franchise headquarters, you’ll be taught everything you need to know, from start-up through daily operations. And once you’re up and running, your franchisor’s support staff should play an active role in your success, with in-person visits and coaching, along with online and telephone support to answer your questions and help you over any hurdles you may encounter.
Con: Honestly, we can’t really think of a down side to this one.
4) The Location and Real Estate
Pro: Location, Location, Location
When it comes to setting up your franchise, finding the right location is everything. Major franchisors have in-house real estate departments that can help you find and secure the perfect spot. Even smaller franchisors often have ties with commercial real estate brokers that can smooth road bumps when it comes to negotiating the lease agreement.
Con: Competing Locations
You may have a successful franchise, and out of the blue one day your franchisor might decide not to renew your franchise agreement for the following term. Why? There could be another franchisee nearby whom the franchisor favors for some reason. Maybe it’s adjacent to another type of franchise they own, which doubles their profit. Don’t kid yourself; your location is just another pawn on the franchisor’s chess board.
5) The Marketing Materials
Pro: Marketing Assistance
Many local businesses don’t have the resources to hire a big marketing firm, nor the time or expertise to create their own professional-looking marketing materials. Fortunately, as a franchisee you should have access to ready-made templates and pre-printed materials for use in your franchise. Although you’re expected to develop and implement your own local marketing plan, don’t be afraid to ask for assistance from your franchisor. Many large franchises even provide specific funding for local marketing campaigns to their franchisees.
Con: National Advertising Fund
Some franchisors may require you to pay 1 to 2 percent of your monthly gross sales into an advertising fund to help pay for all that marketing assistance. All the more reason to make the most of it.
6) The Power of Corporate
Pro: Corporate Purchasing Power
When it comes to purchasing inventory and supplies, you could have the advantage of significant price breaks due to volume purchasing. Some franchisors have a supply chain for everything from major equipment to toilet paper and cleaning supplies.
Con: Required Vendors
Unfortunately, this often means you’re stuck with the choices made at the corporate level, and can’t go out and find your own vendors. Some franchisors even add to their profits by forcing franchisees to purchase products from corporate headquarters at above market rates. Read your contract carefully!
Should You or Shouldn’t You?
As with anything, there are upsides and downsides to owning a franchise. It all depends on your experience level, personality, goals and desires. If you’re a paint-by-numbers type of person who likes to follow directions, set and achieve goals with limited risk of failure, a franchise is right up your alley. If you’re more of a freestyle personality who likes to start from scratch and see what develops, then franchising is definitely not for you.