For many entrepreneurs, the decision to open a franchise is a difficult one. While buying in to an established business concept offers several advantages, it also has some hefty financial drawbacks. 415 Group Partner Richard Craig shares his insight:
When you consider going into business for yourself, you have three basic choices: Start from scratch, buy an existing business, or look for opportunities to purchase a franchise.
A franchise gives you the licensed right to use a service mark, trademark, or business concept. Each franchisee signs an agreement that governs how the business is operated. This ensures a uniform standard of quality within the system.
More than 2,700 franchise businesses exist in the U.S., covering every conceivable industry, from such well-known brands as McDonald's to smaller local establishments. So there's plenty of opportunity if you choose the franchise route. The challenge is to find one that's interesting and a good investment.
Purchasing a franchise business is obviously not a guarantee of success. Here are the main advantages a franchise operation offers:
| Some Questions to Ask Before Buying Into a Franchise 1. How many franchises does the organization have? A large number of franchises may indicate a successful, well-run established business. If so, that's a good sign, but be careful not to locate too near another of the same franchise. 2. How much is the franchise fee? A blue-chip national chain may cost significantly more than most others. 3. What are the royalty fees? The average seems to be between three and six percent. 4. How much help can you expect from the franchisors? Will they help with site selection, licensing and hiring? 5. Is the franchise legitimate? If you're not certain, check with the Better Business Bureau or the Federal Trade Commission. |
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- Uniformity. You can capitalize on a uniform business format and instant brand recognition, as well as tap training and ongoing support from the franchise company.
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- Lower risk. This can be a plus for less-experienced entrepreneurs. While starting a business alone can expose you to a high risk of failure, a franchise can buffer that risk somewhat because the franchise may come with a package that eliminates the guesswork often associated with starting a business.
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- Proven track record. Franchising typically includes an existing product or service, a proven market method, equipment, inventory and support, such as hands-on business consulting and advice.
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- Network power. Franchisees can gain brand recognition from national advertisement and promotion. In addition, there can be power buying opportunities when purchasing inventory, materials and supplies through a network, which can help keep prices down.
- Start-up cash. Some franchise companies provide financing plans.
Certainly, these are advantages that can work for you. But before making the leap, consider the potential disadvantages:
- Lack of power. Franchisees forfeit a certain measure of control over their day-to-day operations. If you have a strong entrepreneurial personality, you may have a problem handling the relationship if you start to feel you are more a manager than a boss.
- Financial risks. Franchises can cost a great deal to start and generally include ongoing royalty fees that you often must pay even if an outlet hasn't earned significant income. Moreover, the central franchiser may face financial problems or actually go under.
- The "caged syndrome." You are typically committed to a franchising agreement that runs for several years, which can lock you into rigid business practices, fees and operating rules.
- Potential for sharing bad karma. Not all publicity is positive. Unethical management or business practices by one franchisee affect the entire system. For example, hygiene and cleanliness issues at one fast food restaurant can hurt sales at the others in the chain even if they have spotless records.
Deciding to go full ahead with a franchise is a difficult and challenging task. Take a look at the Federal Trade Commission's booklet on franchising and then carefully discuss the issues with your professional advisers. As with any investment, the more you know, the better prepared you are to make a go of it.
“Before committing to a franchise, find out where you’ll get the most bang for your buck. What do you really get in return for your franchise fees? Buying power and national advertising are certainly beneficial.
But the one thing that I see missing in a lot of franchises — especially the smaller ones that you don’t see on TV — is benchmarking. For example, McDonald’s has one of the best benchmarking systems out there. As an owner, you receive reports throughout the year that show how your location performs compared to others in your geographic region based on your size and revenue. That information is critical. Our firm has access to several franchise databases, so we can create internal benchmarking reports for our clients to track and measure efficiency and profitability.
Ultimately, the benefits of franchising may depend on your personal experience as a business owner. If you’re new to the game, a franchise may make your life easier by providing you with processes and procedures for day-to-day management. But seasoned business owners may not need that guidance, so they should carefully weigh the added expense of start-up costs and perpetual royalty fees.
At 415 Group, we have experience working with a variety of franchises, whether it’s a restaurant chain, in-home service provider or retail store. We’ll help you evaluate your options and determine the best financial course for your business.”