If your dream is to own a business, you may consider starting your own or purchasing an existing business that’s for sale. Or you might consider jumping into a chain business by buying a franchise. Some people think franchises are the way to go because they are an established brand.
But you shouldn’t jump to the conclusion a franchise is the best business decision for you. It’s important to know the benefits and disadvantages of them to understand if owning a franchise is a smart way for you to make money.
Explaining Franchises
According to Investopedia, a franchisee (new business owner) purchases a type of license allowing them access to a franchisor’s (established business) “proprietary knowledge, processes, and trademarks to allow the party to sell a product or provide a service under the business’s name.”
Franchisees pay a franchisor a variety of fees depending on the business and licenses. These generally include start-up fees, annual fees, and possibly commissions or fees on profits.
With over 3,000 different franchises available in the United States ranging in cost from tens of thousands to millions, and almost 800,000 individual franchises in existence – it’s clear people are making money with franchises.
But don’t believe statistics you’ll find on the internet claiming 90% of franchises succeed compared to only 15% of small businesses. This article from Entrepreneur explains why you should second guess data comparing the two.
Whether you consider retail, food service, personal or children’s services, or a business to business franchise – buying a franchise right for you, for the right price, in the right location and running it well, matters most. But complications may arise and it may be a lot more work than it seems.
Becoming an overnight success, even with a prosperous chain business isn’t reality. Just like being an entrepreneur takes a particular personality and skill set, a successful franchisee has to understand their own strengths and areas of growth and how they align with owning a franchise business.
Benefits of Buying a Franchise
There are benefits to buying a business already recognized as a successfully established brand. But you might not realize all of the other positives in buying a franchise. Here is a list of six ways franchises might help you succeed in business.
You’ll be off to a good start.
Starting a new business is hard, and don’t believe anyone who disagrees. Chose a well-known franchise, and your business will receive recognition right away. Your customers have likely been to other franchise stores and know what to expect. And customers spending money is what you need to be successful!
The foundation of your business is built for you.
Whether you call it a framework, the groundwork, or a playbook – part of buying a franchise business means you’ll likely follow a prescribed business plan. You’ll know exactly what products or services you’ll be selling. And you may be provided training on running the business too. If it’s a turnkey business, you will have all of the equipment and supplies you need to get off to a great start as well.
The size of the franchise may help you cut costs.
You may save money on supplies, equipment, and training if they not already included in your franchise fees. If the franchise is large enough, they can purchase in bulk and pass on savings. They may offer training opportunities for not just management, but for staff too. This can be incredibly helpful for a new business owner who may not have managed employees before.
The franchise will also do the legwork on legal matters and marketing.
Tasks like determining contracts and marketing for your products and services will be done for you. These won’t become one more thing on your “to do” list. The franchisor’s goal is to have creative campaigns bringing in customers, so they also reap the benefit in terms of fees from franchisees.
The franchise has the staff to do research and follow trends.
As a business owner, you’ll be busy running your business and the employees who work for you. Or you will be managing your management team. As a franchise owner, you don’t have to take extra time to follow trends in your industry. You also won’t need to dig deep into company data to determine if advertising campaigns are effective.
As time goes on, franchises make adjustments and may overhaul significant parts of the business. You’ll simply be updated as to new products, services, policies, protocols, and more.
You have the potential to make a lot of money.
Since some of the tasks you’d have to do on your own as an entrepreneur are taken care of by the franchise, you can focus on people. Training your employees and teaching and modeling your expectations is critical to your success.
The better your employees perform, the happier customers will be. Happy customers spend more money and will cause you much less grief than unhappy ones!
Drawbacks of Buying a Franchise
Even with all of the benefits of purchasing a franchise, there are indeed some negatives you need to consider. Lots of paying customers aren’t always a guarantee you’ll be successful – even with a top-rated franchise.
Plenty of things can go wrong.
Even though it sounds like buying a franchise is not an overly complicated way to get started in a business, success isn’t a guarantee. As an owner, you have a tremendous amount of work and responsibility for running your business. If you can’t handle it or if you won’t hire a skilled manager, your success may be very short-lived.
If you want to be creative or make changes, forget it.
One of the biggest complaints about franchises is how little flexibility there is with anything. From the uniforms, color schemes and decorations, to the hours your business can be open, to prices, and location – the franchise may direct every part of the business.
Your “playbook” may have little room for interpretation and adjustments even if you clearly see problems with parts of the existing franchise model.
They’re expensive.
You have upfront costs to purchase the franchise and initial start-up fees, along with profit-sharing to the franchise each month. Expect annual fees as well. And you may even have to reapply years down the road to keep your franchise and sometimes they won’t approve it! You may also need a significant amount of legal advice before you begin the purchase process.
There can still be competition.
If you’ve been in bigger cities, you have probably seen franchise stores a few blocks from each other (in addition to all of the competitors selling the same/similar products and services.) And while there may be plenty of customers, having stores close together may really cut into profits. It’s important to understand what the territory rules are, if any, for new franchises.
The support might disappear after you are up and running.
The franchisor may put a lot of effort into your business as you get started. But the support may quickly fade – or you may have to pay for support as time goes on. Make sure you understand the agreement about on-going training and if it is provided. What the support looks like should be clearly explained in a contract.
Some franchisors may not renew a franchise agreement if there are problems like weak sales.
If it’s a new and popular franchise, it may not last long.
Being popular is one thing but having staying power is another. If you choose to buy a franchise business related to the latest fads because it’s where you’ll “make a killing” quickly, think again. The cheaper and the newer the franchise is, the more problems you may have.
It’s not to say all new or inexpensive franchises are poor investments. But you’ve probably questioned how a franchise business or two in your area could make a go of it, and within a year their doors were closed.
Who Might a Franchise be Best for?
After reading through the pro’s and con’s, if you are brand new to running a business and want structure and support or if you don’t want to create business plans, policies, protocols, or do tasks like marketing – then buying a franchise might make sense. If you are content with taking direction from the franchisor on everything, this model may work well for you.
Who Might Want to Avoid Franchises?
Many franchise owners do best working directly in their franchise and overseeing employees and operations. Unless you have an excellent team in place, depending on others to run your business on a regular basis could cause problems – just like in any business you start or take over.
Those looking to start businesses who are creative or who want to make changes to products and services should avoid franchises. Don’t assume you’ll be able to “tweak things” with a franchise. And consider that most franchises will tell you how to do business, when to do business, and where to do business.
Doing Your Due Diligence Matters
Watch out for slick advertising or promises of easy money with little effort. Before you even consider purchasing a franchise, read and learn from as many sources as you can. If you are still interested, determine the type of business you want and look at options.
When you find a particular franchise, do as much homework as you can on it – even if you have to hire experts to help.
If there are other franchisees for this business anywhere locally, try to find time to meet with an owner. You should also have an attorney or franchise consultant review all of the franchise disclosure documents and assist you with understanding any other legal information related to the franchise.
All of this takes time and energy at a point when you just want to jump in and start your business. Realize patience pays off in a big way. You can avoid many problems by getting clear with where you stand in the franchise agreement from the very beginning.
Recommended – What Business Structure Is Right For My New Business?
Is Buying a Franchise a Smart Way to Make Money
Buying a franchise is like buying any other business. It is essential you do your due diligence and thoroughly investigate the franchise opportunity.
If you believe the franchise model fits your business goals and personality, you can make money by choosing the right franchise and managing it (or having it managed) properly. For most, it is not a passive way to get wealthy. But many find it to be a worthwhile way to make money and be successful in business.
Mrs Groovy says
The business model for franchises is not a one-size-fits-all. You really need to do your homework. Some franchises have such good reputations that they won’t accept just anyone who applies. With those you can probably make a very good living but it’s definitely not a passive situation, as mentioned. What scares me most is the people who are willing to jump in with little due-diligence– and willing to go into debt to purchase. That’s a recipe for disaster to me.