Pros and Cons of Buying a Franchise

What You Should Consider Before Buying a Franchise

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••• Getty Images/Tom Merton

Franchise businesses have a history of creating jobs faster than other startup businesses. The positive economic outlook for franchises has lured many would-be small business owners toward buying a franchise.

Understanding the advantages and disadvantages of franchising can help you decide whether it is a good choice for you. The number one advantage is that you basically receive a kit with plans, a guide, and support for starting the business.

The big disadvantage for many people wanting to start up a business is the initial costs, or outlay, necessary to start a franchise.

Advantages of Buying a Franchise

There are plenty of reasons that franchises are attractive to current and potential small business owners.

The franchise system is usually completely ready for a new owner to set up and start operating. This is known as a turnkey system, named as such because it is very close to being able to unlock the door, walk-in, and start operating the business and generating profits.

If you are willing to pay a little more to get to profitability quicker, then a turnkey franchise might be an option for you.

Some franchise systems offer national advertising campaigns as well as marketing materials, help with local radio, television advertising. Franchisees are sometimes required to invest a certain amount in local marketing and advertising.

Generally, the research that goes into a marketing campaign, as well as most of the strategies, come from the franchise. Owners usually have help from the corporate office to ensure the brand message remains consistent and the marketing proves profitable.

Independent small business owners often have very little support or lack a support team with business acumen. Buying a franchise offers the opportunity to network with other entrepreneurs creating an opportunity to share experiences. As the franchise saying goes, you're in business for yourself, but not by yourself.

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.

The collective buying power of a franchise group allows for lower costs in purchasing inventory and equipment. This is generally due to the power of the brand name because it gives assurances that you will be a continuous and reliably paying customer.

Independent businesses usually have less bargaining power with suppliers because of the same reason.

Finding good employees is a critical success factor for many 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.

Disadvantages of Purchasing a Franchise

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

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 $20,000 or more. Sometimes franchisors require you to have a minimum net worth, and cash or liquid assets available for additional purchases or later requirements.

Occasionally, the initial amount needed upfront can be offset, as there are franchises that have financing assistance available through contracted third party lenders.

Most franchisees are required to make royalty payments in return for support in operations and advertising. Royalty payments are deductions a franchisor might take from your revenue each year. They also may take a percentage of revenue for marketing and sales support.

Owning your own business allows you to operate it the way you want to, and not have to report to anyone. Franchisees are usually required to share financial information and conform to standard operating procedures and policies of the franchisor.

Some franchisors may not provide all the necessary resources for the success of your location. The franchisor may not have the ability to provide market or field support. In this circumstance, owners can sometimes become more dependant on the franchisor to create solutions and solve problems for them.

Also concerning are franchisors that make promises of support, but don't deliver. 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.

Final Thoughts

Buying a franchise can be a worthwhile endeavor, but choosing the right franchise is important. If you've done your research, and picked a franchise that works the way you want it to, you'll more than likely be successful.