Pros and Cons of Opening a Franchise Business
If you’re interested in buying into a franchise, consider the pros and cons featured in this post prior to deciding.
Established Business Model
Depending on how old the company you’re buying into is, the business model could be more than 50 years old and still earning profits.
According to Business Insider, 42 percent of small businesses fail because the market for their product or service is lacking a significant market. By owning a franchise, you’re ahead of the game because you know there’s history for this being a profitable business that has customer demand.
Access to the Franchiser’s Resources
If you open a franchise, you’ll receive detailed instructions on how things are to be done – down to the paint color on the walls. For example, you’ll get training in operations, marketing, technology, accounting, and computer systems that are companywide. This training can be beneficial, as it’s unlikely you’d gain all of this experience by opening your business independently. Plus, access to the franchiser’s resources and training will enable you to be more successful once you open your doors.
Marketing and Advertising
If the franchise you own is a well-known brand, marketing will be easier than if you start an independent company. That brand name goes a long way towards customer loyalty. Plus, the company will have marketing plans and promotions already planned for you. In addition, you could be able to collaborate on local promotions with other franchise owners. For example, if your town loves baseball, give away a free pizza topping if the team wins, or combine your efforts and sponsor a team.
With a franchise business, you have the corporate office supporting you and rooting for your success. You might have a manager that comes to your store and helps with employee training, a centralized office that answers phones, or a support team that you can call if you have questions. The support is usually included in the franchise fee, and can be invaluable when you’re first starting out.
If you don’t want to be held to stringent standards, you’re better off starting an independent company, because franchisees must follow a long list of rules. From branding and advertising, to menus, and even uniforms, all franchises must look, act, and taste alike. This is why a Big Mac tastes the same in Maryland and Montana. It can be a good thing if you like structure and don’t care about having creative freedom in your business, but if you want more independence, it could be frustrating.
High Startup Costs
Most franchises will cost you $50,000 to $200,000 to get started, but costs can be as low as $10,000 (for a mobile company) or as high as $5 million (for a hotel with land). First, you’ll need to pay the franchise fee, a one-time payment for licensing, training, and access to operations methods and ongoing training. This is typically $20,000 to $30,000, but can be as high as $100,000 for luxury or well-established brands. You’ll also have costs for equipment, land, labor, licenses, rent, signage, employee training, inventory, store or office setup, just to name a few examples.
Royalties and Fees
Unfortunately, you’re not off the hook once you’ve paid the franchise fee. You’ll still need to pay royalty fees that will be around four to eight percent of gross revenue, and two to four percent for marketing and advertising fees. These fees are typically paid monthly, but some are paid weekly.
Again, if you don’t like rules, this could be a downside to you. When buying into a franchise, you’ll need to buy all your equipment, supplies, and materials from company-approved suppliers. Even if you can save $500 a month by buying different straws, you’ll still need to buy the straws from the company supplier. This can save you time, because you don’t need to find suppliers. It has the potential to save you money as well, because the corporate headquarters could be able to negotiate cheaper rates for mass quantities. However, these still might not be the lowest possible rates. This is just one example; as you’ll be required to purchase uniforms and other materials through franchisor-approved vendors as well.
Conclusion: If You Want Freedom, This Isn’t for You
While owning a franchise can be an easy way to own a store within an established company, it doesn’t allow you the freedom and creativity that owning an independent company does. Still, it also doesn’t come with the risks, because franchises have branches in many locations and their business model has been tested.
Do you own a franchise business? If so, tell us about your experience in the comment section below!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.