Franchise – To Buy Or Not to Buy

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Is a Franchise Right For You?

I have experience in various kinds of businesses including a few national franchises. Franchising is one that I recommend – in some cases. It’s true that franchising increases your chances of success but – is it right for you? There has to be a good fit for you and the franchiser because it will be a relationship. The door swings both ways.

What Is a Franchise?

A franchise is a type of license a franchisee is given to allow them to have access to certain proprietary knowledge, business procedures, processes and trademarks in order to allow the franchisee to sell a product or provide a service under the trade name. Usually in exchange for getting this privilege, you will be required to pay a franchise fee. There may also be ongoing royalty fees and annual licensing fees.

Advantages to Buying a Franchise

Some of the more obvious advantages to buying a franchise is first of all you have access to an established brand name and so you have a jump at making yourself known. Also the risk of failure is less because other franchisees are working the system and surviving perhaps even thriving in the business. The franchiser is required to disclose financial information on the parent corporation. By law you should receive a franchise offering circular that discloses information like legal issues, past and present, the agreement, and a list of existing owners (who you can call). Another really good thing is the franchiser is relying on you to succeed and for many reasons. Your success is the franchiser’s success. Because when a franchiser has a history of success they’ll be able to sell more franchises and the franchise will increase in value. Not only that but as is the case in many franchises the franchisers make money on product sales to the franchisee. So you are not going into business alone, you are participating in a win – win situation in a lot of cases.

One indicator for me as to a franchise’s strength is when there are multiple franchisees who own more than one franchise. That shows that the guys that are in the business like the business.

Also, a franchiser will usually offer training at their corporate office and/or another facility or maybe at a store in operation where you can get some on the job training.

There are other advantages too. Look a little closer and you’ll see some key points that will help you succeed.

Some of the not so obvious advantages include, (A) you have access to other franchisees that you can confer with when issues or questions arise. You should even check to see if there is a dealer association that helps with franchisee/franchiser relations and business decisions that affect the franchisees, (B) training involves teaching techniques that are proven to work, and (C) there are usually advertising cooperatives.

Disadvantages

As with anything else in life there are drawbacks too.

Some disadvantages include franchise fees – a range that I have seen can be from several thousand dollars to hundreds of thousands. True the fee covers the brand awareness marketing and business systems that have been tried and proven to work and it sometimes covers the training that is done but it won’t cover the expenses of getting to the corporate offices for training, hotels, meals, it won’t cover the building lease, remodeling, furniture & fixtures, computers and inventory, or employee hiring and training. And then of course you are unemployed while all this is going on – living expenses have to be figured in. It’s all the additional expenses that have to be paid for before you get the first paying customer. Also, there are usually ongoing franchise fees in the form of royalties on monthly gross sales – something around 5% to 15% in some cases. Take that right off the top of the cash flow projection when you sit down to figure that out. If you have to purchase product it is usually a requirement of the franchise agreement that you purchase your product through the parent company, you have no say over who you will buy from in a lot of cases (unless there is a dealer association).

With any business there will be the learning curve, factor it in and do as much as you can to ‘foresee’ scenarios in your market. Just check out the company, the history, the time in business and do your own projections based on your new knowledge.