Pros and Cons of Buying a Franchise

What You Should Consider Before Buying a Franchise

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••• Getty Images/Tom Merton

Buying a franchise can be a great way for those with an entrepreneurial spirit to own and operate a business. Also, corporate employees experiencing downsizing or unfavorable work conditions may consider buying a franchise as a viable career option.

According to the International Franchise Association, franchise businesses have a history of creating jobs faster than other businesses. The positive economic outlook for franchises has lured many investors into buying into a franchise, but is a franchise right for you?

Before you take the leap, consider the pros and cons of buying a franchise.

Pros of Buying a Franchise

There are plenty of reasons that franchises are attractive to current and potential small business owners. Consider the following pros of owning a franchise business:

A Turnkey System

The franchise system is a proven system for operating the business and generating profits. If you are willing to pay a little more but get to profitability quicker, then a turnkey franchise should be considered.

Marketing and Advertising

Some franchises systems offer national advertising campaigns as well as marketing materials, help with local radio, and T.V. ads. Franchisees are typically also required to invest a certain amount in local marketing and advertising. However, franchisees have help from the corporate office to ensure the brand message remains consistent and the marketing proves profitable.

Franchise Support Network

Small business owners often have very little support or lack a support team with business acumen. Buying a franchise offers the opportunity to share your challenges with other entrepreneurs who are facing or have faced the same problems. As franchise companies state, you're in business for yourself, but not by yourself.

Benefit from a Brand Name

The more established franchises provide a brand name and market awareness to franchisees, which can attract customers. As a result, a franchise can save business owners time and money in building a brand and a reputation allowing them to run their day-to-day business.

Lower Inventory Prices

The collective buying power of a franchise group allows for lower costs in purchasing inventory and equipment. Independent businesses usually have less bargaining power with suppliers.

Recruiting and Training of Staff

Finding good employees is a critical success factor for many independent small business owners. A franchise business with a recognized name will typically have established recruiting and training programs to attract and retain the best talent.

Cons of Buying a Franchise

Though buying a franchise has its advantages for the small business owner, it doesn't come without its disadvantages.

Start-up Costs can be High

Buying a brand name franchise is often beyond the financial capability of many potential business owners. For example, many franchises require you to make an initial investment that can be anywhere from $5,000 to over $1 million. Also, you're often required to have a minimum net worth, and liquid cash available if needed as well as good credit. An independent business may be more financially realistic if the owner has trouble meeting the requirements for investing in a franchise.

Royalty Payments

Each year franchisees are required to make royalty payments in return for support in operations and advertising. In other words, they might deduct a percentage of your revenue each year. They also may charge a percentage fee for marketing and sales support.

Less Privacy, Freedom, and Flexibility

Franchisees are required to share financial information and conform to uniform operating procedures. If you own an independent business, you can run it the way you want. However, with a franchise, you must adhere to their corporate policies.

Risk of Inadequate Support

Some franchisers may not provide all the necessary resources for the success of your location. The franchiser may not have the ability to provide market or field support. Owners can become reactive and expect the head office to solve all the problems. On the other hand, franchisers can sometimes make promises of ongoing support only to find you're on your own, which can lead to a toxic relationship. In your own business, the only person you count on is you. Be sure to do your research and speak with other franchisees for feedback about the level of support, training, and help that you'll receive.

The Bottom Line

Buying a franchise can work but choosing the right franchise for you is important. For example, some franchises require you to have management and ownership experience while others require little experience. Take the time to consider your options to decide whether buying a franchise is right for you.