Franchises are widely popular in North America with as many as 4,000 available brands located throughout the United States. As of 2018, there were approximately 758,000 franchise establishments employing nearly 7.88 million people.
When it comes to starting a business, many people choose owning a franchise based on the belief that success is guaranteed. Unfortunately, this is not always true. It is, therefore, important to understand the pros and cons of owning a franchise to ensure you are making the best decision for your situation.
What Is a Franchise?
A franchise provides an opportunity to buy into an existing, successful business model that has a proven track record, a successful training program, a solid supply chain, and expert technical support. Some of the best-known franchises have impressive success rates, with low chances of failure.
If you're considering buying into a franchise, knowing the advantages as well as disadvantages can help you best decide if this is the right venture for you.
Advantages of Owning a Franchise
Owning a franchise has several advantages such as:
- Low failure rate. When you purchase a franchise, you are buying an established concept that has been successful. Statistics show that franchises have a much better chance of success than independent start-up businesses.
- Business assistance. Franchise owners receive valuable assistance throughout the life of their business. Many franchises are, in fact, turnkey operations. When you buy a franchise, you receive all of the equipment, supplies, and instruction needed to start your business. In many cases, you receive ongoing training and help with management and marketing. For example, your franchise will reap the benefit of the parent company's national marketing campaigns.
- Buying power. Your franchise will benefit from the collective buying power of the parent company, which passes on the savings to franchisees. Thus, inventory and supplies cost less for a franchise than for an independent company.
- Star power. Many well-known franchises have national brand-name recognition. Owning a franchise is similar to buying a business with built-in loyal customers.
- Profits. A franchise business can be immensely profitable. As expected, the most proven, popular franchises, such as McDonald's and Tim Horton's, tend to have much higher franchise costs but are more likely to generate high returns on investment (ROI).
Disadvantages of Owning a Franchise
The disadvantages to owning a franchise must also be considered and include:
- Rules and guidelines. The main disadvantage of buying a franchise is that you must conform to the rules and guidelines of the franchisor. Some franchisors exert a degree of control that you, as a supposedly independent business owner, may find excruciating. Depending on the franchise agreement, the franchisor may be able to dictate certain terms such as the business location; hours of operation; product pricing; signage, layout, and furniture; use of franchisor-supplied products; and franchise resale conditions. The argument for this level of control is to maintain the uniformity of the product so that each franchise location has the same look and feel to the customer.
- Ongoing costs. Besides the original franchise fee, a percentage of royalties from your franchise’s business revenue will need to be paid to the franchisor each month. The franchisor may also charge additional fees for services provided, such as the cost of advertising.
- Ongoing support. Not all franchisors offer the same degree of assistance throughout the life of your business. Some are solely startup operations and everything after the beginning is up to you. Others make promises of ongoing training and support that never occurs.
- Cost. Buying into a well-known franchise is costly. If this is your choice, you will need to provide a large amount of money up front or arrange for the necessary financing. To give you a better idea, the following table presents recent costs and capital requirements for some of the major fast food franchises:
|Franchise||Total Investment||Min. Liq. Assets||Franchise Fee||Avg. Sales|
|McDonald's||$1 - $2.3 mil.||$750,000||$45,000||$2.5 mil.|
|KFC||$1.3 - $2.5 mil.||$750,000||$45,000||$940,000|
|Taco Bell||$1.2 - $2.5 mil.||$750,000||$45,000||$1.4 mil.|
|Wendy's||$2 - $3.5 mil.||$2 mil.||$40,000||$1.5 mil.|
|Subway||$120 - $260,000||$30 - $90,000||$15,000||$490,000|
- Risk. Buying a little-known, perhaps inexpensive franchise can come with risks. Just because a business is offering franchises is no guarantee that the franchise will be successful. While some franchise operations may perform reasonably well, they may never achieve the owner's desired level of profitability. Also, in some cases, selling franchises is the franchisor's business, regardless of whether they are successful. Therefore, any franchise you're considering needs to be investigated carefully.
The Franchise Application
If you found a franchise that you would like to purchase, you must first contact the franchisor. Upon expressing an interest, the franchisor will likely ask you to complete a questionnaire or application form. When filling out the application, be prepared to provide detailed answers to questions about your finances, such as your personal assets, as well as your spouse's financial situation. The franchisor wants to make sure you are financially prepared to make the commitment and have the necessary backing in case the business runs into financial difficulty.
Other questions may relate to your experience, background and goals, which can indicate your competence in running the business successfully and in accordance with the franchise model. It's especially important to franchisors that the franchise model be maintained, as a franchise's success depends on the uniform application of the system they have developed.
Once you pass the questionnaire or application test, the next step is meeting with the franchisor. The franchisor will continue to explore your interest, commitment, and suitability; while your goal is to find out as much as possible about the franchise.
The Franchise Agreement
If the franchisor decides you are a suitable franchisee, you will be offered a franchise contract that lays out the obligations of both parties. You should seek legal advice about the contract and review it carefully. Like any other contract, some aspects of it may be open to negotiation. Also, like any other contract, if there are any promises made about the franchisor/franchisee relationship that are not in the franchise contract, request that they be included.
Buying a franchise is like buying any business in that you have to do your due diligence and investigate the franchise fully. However, if you are well-suited for a franchise operation and select the right franchise, being a franchisee can indeed be the fast track to success.