A franchise is a business model in which the franchisor (the owner of the business) grants the franchisee (the individual who buys a franchise location) the right to operate a business using the franchisor’s trademark, products/services, and operational systems.
Buying a franchise can be a great opportunity for those who want to own and operate their own business, but it’s important to understand the benefits and drawbacks of this business model before making a decision. In this article, we’ll take a closer look at the pros and cons of buying a franchise.
Pros of Buying a Franchise
A franchise brings many benefits including access to an established brand, ongoing training and support, and a proven business model. Unsurprisingly, this leads to strong business and financial performance – franchises created $790 billion in economic output in 2021.
Here’s a rundown of the major benefits attached to buying a franchise:
1. Established brand recognition
One of the biggest benefits of buying a franchise is that you’ll be operating a business with established brand recognition. This can be especially valuable in industries such as food service and retail, where customers are likely to be familiar with the franchisor’s brand. This established recognition can help you immediately attract customers and build your business more quickly than if you were starting from scratch.
For example, how quickly have you seen new McDonalds locations get up and running successfully? That’s brand power for you!
2. Proven business model
When you buy a franchise, you’re essentially buying into a proven business model. The franchisor has already tested and refined their business model and has the financial statements to prove it. The franchisee is expected to follow the franchisor’s established systems and procedures. This can help reduce the risk of failure, as the franchisee is following a model that has been proven to be successful instead of guessing what customers like, how best to serve them, and what to price your products or services at.
3. Training and support
When you buy a franchise, you’ll always receive comprehensive training and support from the franchisor. This can include everything from initial training on how to run the business to ongoing support and assistance with marketing, advertising, and operations. This support can be especially valuable for first-time business owners who may not have the experience or resources to run a business on their own.
When things get a little rough or you start to experience a down turn, you can have confidence knowing that you’ll have specialized care to ensure that your location is successful. Afterall, no franchisor wants to see their brand tarnished by a failed location.
4. Access to financing
Many franchisors have relationships with lenders and can provide assistance with securing financing to purchase the franchise. This can make it easier for the franchisee to secure the capital they need to start their business.
In addition, you’re much more likely to be assess favorably by banks when you buying into a franchise as opposed to when you are seeking a loan to start a business from scratch. This financing will be a crucial leg up to getting your business off the grounder faster and at a more profitable clip.
5. Marketing and advertising support
Marketing is at the heart of all good businesses because it’s what gets the customers through the door and ready to buy. Franchisees often benefit from significant marketing and advertising support from the franchisor. This can include national advertising campaigns, as well as local marketing efforts that are tailored to the specific franchisee’s location. This support can be especially valuable for franchisees who don’t have the resources or expertise to create their own marketing campaigns.
6. Buying power and economies of scale
Franchisees often benefit from the buying power and economies of scale that come with being part of a larger organization. For example, franchisors may be able to negotiate lower prices from suppliers, which can result in cost savings for the franchisee. There is tremendous power in being part of a larger collective.
7. Lower risk than starting a business from scratch
Finally, buying a franchise can be less risky than starting a business from scratch. The franchisor has already proven the business model and established systems and procedures, and the franchisee is expected to follow these established processes. This can help reduce the risk of failure and increase the chances of success.
Cons of Buying a Franchise
Despite all their benefits, buying a franchise isn’t all sunshine and flowers. There are several drawbacks to owning a franchise, including the following:
1. Limited autonomy
One of the biggest drawbacks of buying a franchise is that the franchisee is expected to follow the franchisor’s established systems and procedures. This can limit the franchisee’s ability to innovate and make changes to the business. Additionally, the franchisee may be required to follow strict guidelines for everything from marketing and advertising to operations, which can limit their ability to run the business as they see fit. The tradeoff is that the franchisor’s system is proven to be successful, so you can be sure that there will be a good financial return in the least.
2. High upfront costs
Buying a franchise can be a significant investment, with high upfront costs that include franchise fees (typically from $25,000 to $50,000+), equipment and supply costs, fixturing and construction of a new location ($200,000 to $500,000+), and marketing and advertising costs of opening a new location. Additionally, franchisees may be required to pay ongoing royalties to the franchisor which can be a significant ongoing expense. The initial investment is not for the faint of heart, but again, you’re paying for an already established business and brand.
3. Limited control over pricing
Franchisees may be required to follow strict pricing guidelines set by the franchisor. This can limit the franchisee’s ability to set their own prices and can impact their profitability. In most cases, the only significant control that franchisees will have over profitability is to increase revenue, which comes from increasing marketing efforts. This is a little different from most businesses where you have the flexibility and control to increase your take home pay by increasing your per-sale profit.
4. Competition with other franchisees
Franchisees may be competing with other franchisees within the same franchise system, which can make it difficult to attract customers and build a successful business. Additionally, the franchisor may open additional locations near existing franchisees, which can further increase competition.
In most cases you can prevent this by negotiating for an exclusive territory where no other franchisees can operate. However, not all franchisors offer this perk, so you have to be wary.
5. Dependence on franchisor
The franchisee is dependent on the franchisor for ongoing support and assistance, which can be a drawback if the franchisor is unable or unwilling to provide that necessary support. Unfortunately, there are some unscrupulous franchisors that will bring you into their system just to make a quick buck from the initial franchise fee and then leave it up to you to sink or swim. This is why it’s so important to do some proper due diligence and ask the right questions before getting into any franchise that you are interested in.
Additionally, if the franchisor experiences financial difficulties, this can impact the franchisee’s business as well. If a franchisor is not managing their finances properly, they would have not invested in a good team to support all of the franchisees. In this case, your support will surely be limited, if not subpar.
6. Strict adherence to franchisor's systems and procedures
The franchisee is expected to strictly adhere to the franchisor’s established systems and procedures, which can be time-consuming and restrictive. Additionally, the franchisee may be required to make significant investments in equipment and supplies to conform to the franchisor’s standards, which can be a significant expense.
The most worrisome aspect comes from situations where you accidentally fail to meet the requirements of the system, the procedures or the operations manual. In most cases, the franchise agreement will protect the franchisor by allowing them to terminate you for failing to meet the requirements. This makes it very important to know your obligations and to always uphold them.
7. Limited ability to sell the business
Finally, franchisees may have limited ability to sell their franchise, as the franchisor has significant control over the sale process. The franchisor may even have the right of first refusal, which means they have the right to purchase the franchise before it can be sold to a third party.
For more information about how to negotiate for a fair exit clause in your franchise, see our other blog on 5 Franchise Killers to Avoid in Your Next Franchise Agreement.
Conclusion
Buying a franchise can be a great opportunity for those who want to own and operate their own business. However, it’s important to carefully consider the pros and cons of this business model before making a decision. While a franchise can offer the benefits of established brand recognition, a proven business model, and comprehensive training and support, it can also come with limitations, such as limited autonomy and high upfront costs.
Ultimately, the decision to buy a franchise should be based on a careful consideration of the individual’s goals, financial situation, and ability to operate a business within the franchisor’s established systems and procedures.
That starts with receiving professional advice before taking the decision to buy a franchise. At Hansra Law, our experienced franchise attorneys know all about buying franchises – we’ve advised many buyers like you and helped them secure profitable franchise investments. If you’d like more information, download our Ultimate Franchise Negotiation Package or contact us today.
