Category Archives: Franchise

The Benefits (and Burdens) of Franchises

You have the entrepreneurial spirit. You want to open your own business. You want to be the boss. For the prospective entrepreneur, franchising offers great benefits, but also comes with significant burdens.

“a franchise can make your dream come true”

Benefit 1: Know How: Franchises are generally created from successful small businesses. Business owners, who have spent years perfecting their business model, have taken that wisdom and put it into franchise-training programs. Not only will most franchisors teach you how to provide the core good or service involved, they also will teach business skills like record keeping, inventory management, accounting and employee management. Many prospective entrepreneurs already know how to perform the core task and have good business skills, and will not find this to be a great help, or may even find the mandatory business methods of the franchisor to be limiting. For others, however, the training programs and manuals are a significant advantage.

Benefit 2: Name Recognition: When you franchise, one of the greatest benefits you are buying is the name recognition – the trademarks – of the franchisor. All small businesses must develop a reputation for excellence, either in service, quality or price. When you purchase a franchise, you are buying that franchise’s existing reputation. This is a significant advantage. Earning a reputation takes hard work, time and money. A good franchise allows you to start with a name recognition and reputation for quality that most start-ups can only dream of.

Benefit 3: Advertising Reach: Most franchisees pay an advertising fee as a part of their franchise agreement. Sometimes this money is simply money the franchisee is required to spend; sometimes, this money goes into a regional or national advertising co-operative run by a committee of the franchisees; sometimes, this money goes directly to the franchisor for national and regional advertising buys. Whichever of these, or combination of these, your franchisor selects, the result is usually that your advertising dollars go farther and have a greater impact than the same money, spent by a single small business, would.
This combination of know-how, brand recognition and increased advertising reach is designed to let you get started quickly and move successfully through that early period where so many small businesses fail because they could not generate gross revenues fast enough. This is what makes franchising such an attractive prospect for many entrepreneurs. Then again, the many benefits of franchising have their own drawbacks as well.

“The wrong fit will turn your dream into a nightmare”

Burden 1 Cost: The primary trade-off for all these benefits is the cost. Franchises are expensive, not only at the beginning, but throughout the life of the business. Most franchises begin with an up-front franchise fee. This is an cost you just do not have if you start your own business from scratch. Franchises also generally come with a permanent franchise royalty, which is often 5-10% of your gross revenues. Added to the franchise royalty are recurring advertising payments of 1-3% of gross revenue. You may also have mandatory continuing training costs, store remodeling or signage costs, and other hidden costs or fees. You must carefully consider whether the name recognition or advertising reach of a particular franchise is likely to drive enough revenue to the business to compensate for the fees you will be paying. You may make more money off less revenue without the fees.

Burden 2 Control: One of the primary reasons entrepreneurs go into business for themselves is to have control over their business and work environment. With a franchise, you surrender some or much of that control to the franchisor. The appearance of the store, uniforms, what you can sell, when you can be open, where you are located, whether you can expand, how and when you can advertise, whether you can give freebies or support local charities – all of these, and more, may be controlled or restricted by your franchisor. If control is one of your motivations for opening a business, you should carefully explore how much control you are being required to surrender to any potential franchisor before deciding whether to go into business with them.

Burden 3 Exits: Exiting a franchise is often a time of great frustration. Selling a franchise is much tougher than selling any other small business. The rules for how to sell, to whom you are permitted to sell and for qualifying potential purchasers are complex and can be maddening. The fees and costs imposed by most franchisors are steep. Often, the most difficult problem is the time the franchisor requirements add to getting a deal done – which can kill potential sales. Trying to continue your own business life outside the franchise model can be even harder. Most franchises come with tough non-compete clauses that prevent you from leaving and starting your own new business and many franchisors are ruthlessly aggressive in enforcing them. Worst of all, some franchises come with a built-in 10-15 year expiration date and sometimes have no guarantee of renewal. Imagine the frustration of building a market for a particular franchisor for an entire decade, only to have them not renew the franchise to you and sell your business off to someone else or turn it into a ‘company store’.

Tip: Have an attorney review the franchise agreement for any such potential gotcha’s, and do some investigation into any potential franchisor’s reputation among franchisees as well as their history of litigation.

“Take your time to investigate any potential franchisor carefully”

For the right entrepreneur, a franchise can make your dream come true, but the wrong fit will turn your dream, into a nightmare. Take your time to investigate any potential franchisor carefully, and see if franchising is the right fit for you.