The Pros and Cons of Franchise Ownership
January 31, 2023 | Last Updated on: February 6, 2023
January 31, 2023 | Last Updated on: February 6, 2023
Franchising is an exciting way to get into small business ownership for those who don’t want to start their own company and brand from the ground up, those who don’t think they have their own idea, or those who want procedural and operational guidance from an organization that has successfully done it before.
When most people think of franchising, they often think of food and retail franchises. However, there is a lot more to franchising than just food and retail! There are over a thousand distinct franchise ideas operating in the USA today, spanning over fifty different business sectors. This indicates that there is a substantial variety of franchising options available to anyone who are interested in running their own company.
The fact that something is offered as a franchise does not necessarily mean that it is of high quality. There are many franchises in existence that are struggling or relatively new and may not have the proper structure or support that works for you. Being a franchise simply indicates that it is being replicated, which is why it is in the best interest of a potential franchisee to conduct extensive research before making a purchase.
To assist you in selecting a lucrative enterprise that is in line with your objectives, we have taken the time to outline some of the various pros and cons of owning a franchise and why they matter or are important. In this article, we’ll cover the following:
Some of the franchise opportunities that might help your business plan and get you brand recognition are as follows:
The purchase of a franchise gives you the opportunity to enter a line of work in a sector for which you do not necessarily have any prior work experience but which piques your interest.
Franchise brands, also known as franchisors, provide their franchisees with significant and in-depth assistance and training in order to educate them and assist them in better comprehending the business model used by their respective firm.
As a franchise owner, you will be privy to information, expertise, and industry secrets that you otherwise would have had to acquire over the course of your career via a process of trial and error if you had not entered into an already renowned name that has (presumably) been running for years.
Starting a franchise means you will have access to these advantages. When you buy a franchise, you have access to the years’ worth of first-hand experience that has been accumulated by the company’s past owners and executives, which boosts your chances of being successful.
Since they have the support and backing of a bigger and more established firm, franchises are a more solid investment than new enterprises that are just starting out. These companies have successful business ideas that have previously been evaluated, often in a variety of marketplaces located around the nation. They have shown that they are successful on their own and that the concept is popular with consumers.
It is much simpler to get a loan for a franchised firm due to the fact that franchises often have a longer and more established track record of profitability than independent startups do. As a result, it is easier for lenders to assess the risks associated with the venture and determine whether they think the borrower will be able to successfully repay their loan in full.
Financial institutions are aware of the fact that investing in a franchise is a more secure bet than investing in a brand-new company that has not yet had the chance to establish a track record of profitability. The safer the bet, the more likely a lender is to provide funding.
When you buy a franchise, you get to bypass a lot of the work that goes into marketing and branding a new, unknown business. This is one of the reasons why so many people turn to franchises!
One of the toughest things about starting any new business is finding your first consumers. When you invest in a franchise, you have access to an existing consumer base that is devoted to your brand, as well as a possible staff pool. When you buy a well-known and established brand, you may shorten the time it takes to reach profitability by attracting consumers and potential workers right from the start of your ownership of the business.
When you invest in a franchise and become a part of the franchise system, you will be able to take advantage of the long-standing, established connections with vendors that your franchisor has cultivated.
As a result of this, there is typically a decrease in the cost of materials as a result of the collective purchasing power of the franchisor. This means that you can establish higher margins on your products than you would otherwise be able to when operating a single storefront brand of your own making.
The majority of franchisors place a high priority on providing their franchisees with support, particularly in the early stages of their businesses. They do this by providing pre-opening assistance with a variety of business-related tasks, such as site selection, design, construction, financing, training, and grand-opening programs.
The aid does not end there! Several franchises even provide their franchisees with business loans and other sorts of financial assistance of varying kinds. Franchisors want their franchisees to be successful because it impacts the national brand’s relationship with customers as well as its profitability. As a result, they have a vested interest in your success over both the short run and the long run.
Being your own boss is one of the benefits that come with owning a franchise. You will be able to design a schedule that is more accommodating for you, and you will have more flexibility in terms of setting your own hours.
That said, you should expect to work a lot if you are going to start a business. Just because you will have added flexibility over when you work doesn’t mean you will get to work less. Instead, you will almost surely end up working far more than the average everyday employee, especially in the early stages of the business. So, this is something to keep in mind and carefully consider before starting a franchise. Ask yourself if you think you have the drive and the passion needed in order to be willing to put in the hours to make your franchise business a success.
Franchising also comes with a series of cons that you should consider. Some of the disadvantages of franchising partnerships are as follows:
Every business has startup costs, but franchises are commonly thought to be more expensive than other types of businesses. This perception is in part due to the initial franchise fee, which is a one-time payment that enables you to benefit from the franchisor’s systems, processes, and branding. These things are free, and you will have to pay to have access to them. After all, the national brand has to make a profit in order to sustain itself.
In enterprises that are built from the ground up, the initial expenses are often cheaper. However, over the course of time, the costs can end up being higher due to the cost of errors that may be committed in the process of trial and error for your new business. Simply said, it takes a great deal more time to ascertain what the financial implications of the errors are.
You will also have to pay a portion of your gross sales – often around 10% and sometimes higher – to the franchisor throughout the life of your business. This is how the franchisor makes money, and it is also how it sustains national marketing and development efforts.
The franchisor will offer marketing and advertising assistance, and you will be obliged to make regular payments to cover these costs. However, the franchisor may not necessarily spend every dollar you give on marketing and advertising in your local market.
Instead, some of it is put toward things like optimizing the website, national and/or regional marketing, and so on. Because you may take advantage of the franchisor’s media purchasing prices and participate in the collective development of the brand, your advertising contribution is often worthwhile in the long run. However, this can also be considered a disadvantage if the leads generated by the marketing activities national brand and your franchise itself are insufficient to satisfy the needs of your immediate target audience.
The majority of franchisors will frown upon an overzealous entrepreneur seeking to make changes to the way things are done in the franchise system. If you are the sort of business owner that desires to have full creative control over their company, then franchising may not be a great option for you.
Instead, with franchises, you will be given clear operational instructions and guidelines, and you will be expected to follow them as part of your contact with the national brand. Franchises value consistency across storefronts because they need to build a business model where customers know what to expect from their brand. They can’t have different storefronts doing dramatically different things. Otherwise, the concept of franchising will break down.
One of the most common blunders that individuals make is the assumption that they will automatically attract customers as soon as they invest in a franchise and launch their company.
This is a risky assumption to make since becoming a company well-established in the community that it serves requires a lot of laborious work and concentrated effort, even for well-known brands that have been around for a long time. Just because you open a national brand that is recognized by individuals in your community does not mean they will automatically start coming. You will still need to turn these individuals into customers. Having a reputable and recognizable brand to lean on and leverage makes this easier, but it doesn’t guarantee anything.
When doing your study, you should make sure that you have a complete understanding of the main tasks that the owner of the company has to undertake in order to ensure the success of the firm, as well as the amount of time and effort that these positions need.
Maybe you’re sick and tired of working for somebody else, or maybe you just want more freedom in your work schedule. You’ve come to the conclusion that the best way to reclaim control of your professional life is to set out on your own.
When you live in a nation like the United States, which is rife with opportunities for those who have an entrepreneurial spirit, it may be first daunting to evaluate the numerous choices that are accessible to you.
Making the decision as to whether you want to launch your own company from the ground up or invest in an existing franchise is an excellent place to get started. The question of whether to establish a franchise or a new company from scratch might be a difficult one.
Both choices come with enticing advantages, but each one also has its own particular difficulties. You will be able to determine which alternative is the best fit for your circumstances if you do an in-depth study and thoughtfully prepare thoughtful inquiries.
The following set of questions is designed to assist you in deciding whether you should launch a new business or a franchise. When you are considering the questions that are listed below, it is important that you be truthful with yourself and that you allow yourself room for continued thought.
If you’ve been giving some thought to launching a brand-new company, it’s probable that you don’t mind taking on a certain amount of risk. Having said that, you should think about the level of danger that you are ready to expose yourself to.
Franchises are an attractive choice for company owners who are less comfortable taking risks or who just want to reduce the amount of uncertainty in their lives since they come with a pre-existing network of support and a tried-and-true method of doing business. If you are someone who is not willing to make huge gambles, franchises can be a safer way to enter the small business community and become a small business owner.
Do you consider yourself to be creative and able to see the “big picture,” or do you find it easier to adhere to a predetermined system that has already been mapped out for success?
The advantage of using a franchise model is that all of the preliminary and preliminary work has already been done for you. This includes the creation of a marketing plan, the selection of uniforms and logos, the determination of store layout, the screening of vendors, the ordering of merchandise, and the design of products. You’ll be able to hit the ground running from the very first day of operation.
If, on the other hand, it is important for you to have input on these aspects of a business – if you get excited about creating a marketing plan, picking your own vendors, designing the layout of your store, and deciding on the products and offerings of your business – then starting your own company from the ground up may be more appealing to you than purchasing an existing business. Starting your own company means you will have a ton of freedom to do what you want to do exactly how you want to do it, as opposed to being confined by the standards and rules of a large national brand.
The ownership of a franchise grants you freedom and independence since, ultimately, you are in charge of your own business. You will, however, be required to manage your franchise in accordance with some preset requirements.
These may include disclosing information about your company’s finances or spending a particular amount of money each month on promotion and marketing. Do you think you will be comfortable taking directions at all times? Will you be able to offer products or run promotions even if you don’t personally think they will be successful or are a good idea?
On the other side, the most successful franchise businesses are those that provide their franchisees with a substantial amount of financial information in exchange. Because of this, they are able to compare their performance to that of the other locations in the franchise system.
This presents franchisees with a significant opportunity to enhance their overall financial performance and the profitability of their businesses. Keep this in mind while you contemplate the kind of commercial enterprise that would be most successful for you.
Whether you want to launch a business under your own name or purchase an existing franchise, launching a new firm will need an investment of both time and money. The initial investment required to launch a new company may range anywhere from a few thousand dollars to several million dollars, and this figure is highly variable among industries.
Expenses and initial capital expenditures will seem different for any firm that is just getting started. On the other hand, there are a number of costs that need to be anticipated for every new firm, including the following:
These expenses are a fact of life for proprietors of both large and small businesses alike.
That said, some of these expenditures take the shape of fees for franchisees. Costs associated with research, product development, and advertising are typically a percentage of monthly gross sales for franchises. This means they are more predictable for franchises than for individual businesses. But they also might end up being more in the long run.
As an example, the vast majority of franchisors require their franchisees to pay a royalty fee on a monthly or quarterly basis in return for the right to use their trademark. Typically, this charge is calculated as a percentage of total gross sales.
Additionally, many franchisors require their franchisees to pay costs associated with marketing and advertising. Franchisees have access to in-depth market research and tested marketing campaigns in return for a fee that is paid to the marketing department.
The location of your place of business is an additional factor that will have a significant impact on the first investment you make in either an independent company or a franchise.
Where do you plan on operating your business? Are real estate and rent expensive in that area? This is something you will have to weigh carefully when deciding to open a franchise. You may end up wanting to consider a franchise that has a smaller footprint and thus needs less space to operate, depending on costs and the opportunities available in the area.
The cost of purchasing a franchise may range anywhere from a few thousand dollars to upwards of $5,000,000, much like the cost of establishing a firm from scratch.
Although the initial investment for certain franchises might be rather costly, it is essential to know that there are solutions available that are inexpensive and can be tailored to meet the requirements of any budget.
When it comes to franchising, each brand is unique and will have distinct initial investment requirements, all of which will be detailed in the Franchise Disclosure Document (FDD), which is available for your review.
If you’re looking for a new and interesting career path, the franchise industry might be the way to go. Of course, as with starting any business, intensive research upfront will be critical. You will want to understand the exact parameters and commitments associated with starting the franchise before moving forward. Further, you will want to make sure the company’s values and objectives are in line with your own before committing to a franchise agreement.
Consider your lifestyle, ambitions, and values, together with the characteristics of each company model, as you continue to examine your options. This is not a decision to be made hastily. However, with the proper research and effort, franchising can be an incredible opportunity for individuals looking for an entry point into running their own business.