What are the Pros and Cons of Buying a Franchise
On balance, when you decide to invest in a franchise opportunity with a solid, well designed and managed franchisor the advantages outweigh the negatives. It’s a great way for you to become a business owner. However, if it is essential for you to flex your entrepreneurial muscles and make all of the decisions on how your business should be operated, franchising may not be the right choice for you. Franchising is a system designed to deliver a consistent level of quality and service to consumers and the franchisor will be setting all of the brand standards.
In deciding to become a franchisee, understanding the advantages and disadvantages is important as your ability to succeed in franchising is directly linked to a great extent with the capabilities of the franchisor selected and the performance of the other franchisees that will be sharing the brand with you.
While there are certainly significant benefits that may come with selecting a franchise from an emerging franchisor, the following advantages and disadvantages are based on mature franchise offerings.
Brand Recognition and Acceptance
There is a certain level of quality and consistency that the public has come to expect from any branded business – including company-owned and franchised locations. There is comfort and the perception of less risk when shopping for products and services in well-regarded chains. After all, under a branded system the public has come to expect that each location will look the same, have the same policies and procedures in place, have similar operating hours, pricing, products, services, menus and customer service. Regardless of whether that brand’s products and services are superior or mediocre, there is generally an audience willing to shop there because the products and services meet their unique needs and they can rely upon consistency from location to location, regardless of the market.
An Existing Customer Base
Don’t accept a “poll of one.” Just because you like or dislike a product or service is not important – it is what your customers like and dislike that is important.
Consumers who understand the level of quality and price they desire tend to shop at branded locations that satisfy this need. Because of this, new franchisees in well-established brands open their doors to an established customer base. This leveraging of the existing customers for the brand, frequently created by other franchisees in the system, enables franchises to compete with established local independent operators and against larger franchised and non-franchised competitors in the market. Being part of a well-regarded franchise system may also bring with it the advantage of system-wide accounts developed over time by the franchisor.
Helping You Get Started
Well-structured and managed franchise systems provide you with tested operating systems, site selection and development assistance, tested store designs, construction programs, reduced cost of equipment, initial and advanced training for management and staff, operations manuals, marketing and advertising programs and the other necessary support required to successfully launch your business.
In addition, you get the support from your franchisor when you open and have a network of other franchisees that have been in your identical situation and who can also be of assistance.
Ongoing benefits
The type and frequency of communications and also the level of headquarters and field support provided are also measures of great franchisors.
While not every franchisor does a great job in ensuring that franchisees benefit from the purchasing power of the entire franchise system, most do. In those systems, obtaining inventory and supplies at a cost lower than your competitors can be a major benefit.
Professional marketing delivered in the right way and with the right message is important. By consolidating some of the franchisees’ advertising budgets into a collective brand fund, franchisors are able to develop professionally designed point-of-sale marketing material, advertising, grand-opening programs, and other marketing materials that independents could never afford.
Keeping any brand fresh is essential if you want to win against the competition. Great franchise systems are always analyzing consumer needs and developing new products and services to meet those needs. They are also smart and disciplined enough to eliminate those products and services that no longer have a sufficient following.
Having your brand “own” a market is a powerful advantage against the competition. By leveraging the combined spending power of the franchise system on advertising and then coupling that pent-up consumer demand with targeted strategic growth by adding new locations in a market, critical mass can be achieved. Having sufficient locations in a market to create critical mass squeezes out competitors because your brand is now conveniently accessible for customers.
With critical mass and a well-recognized brand also comes a much more attractive place where people want to work. Also, many local franchisees keep tabs on which of their fellow franchisees are looking for good employees and when the opportunities arise, they often share those applications and even share employees. Managing labor costs through better scheduling tools and networking with other franchisees on labor issues is also becoming of significant importance.
Loss of independence
Franchising requires you to give up some freedom from making some basic decisions on how you want your business to operate. For example, you can’t simply add new products and services or even eliminate those you would prefer not to sell. Your franchisor may dictate your hours of operations and even pricing may be set or influenced by the franchise system. Don’t expect to purchase your inventory from whomever you choose, even if that vendor has a special price this month. In most well-run systems, choosing the vendors is going to be done for you. The lack of independence for some people is the most serious disadvantage of becoming a franchisee. Franchise systems are structured so that franchisors have the right to establish the brand rules and you will be obligated to operate your business based on the franchisor’s brand standards. If the loss of freedom is something you will not be able to tolerate, don’t become a franchisee; you will never be happy no matter how much money you make.
Over-dependence
On the other side of the pendulum is the possibility of becoming over-dependent on the franchise system. While the franchisor specifies the methods of how you need to operate to meet brand standards, it is your sole responsibility to manage and operate your business on a day-to-day basis. No one is going to take that burden from you.
When franchisees rely totally on the system for their success, their over-dependence causes other problems. For example, while a franchisor may have national or regional advertising, if franchisees do not invest in local marketing they will not bring targeted customers to their locations. Also, while the franchisor’s support team is available to help you make decisions, it is the franchisee’s job to run the business on a day-to-day basis and learning to manage the business is important to the franchisee’s success. You need to balance system restrictions with your ability to manage your own affairs.
Other operators
While branding is one of the reasons for joining a franchise system, because it brings customers that know the quality and consistency of what you have to offer, the biggest risk to your business is the performance of other franchisees. Franchisees are not only judged by their own performance but by how well other franchisees operate. If the hotel room or bathroom is dirty in one location the public assumes the problem exists throughout the system. You must work with your fellow franchisees to ensure that everyone operates to achieve the standards of the system.
Income expectations
Prospective franchisees sometimes have unrealistic expectations about the income they are going to earn. Having realistic expectations is important to any investment decision. It is important in the due diligence process that you realistically understand how much money you will likely earn as a franchisee.
You should be particularly wary of any company that “guarantees” profit or certain success. If you hear a claim about a company that sounds too good to be true, it probably is. Investigation of all earnings claims made by a franchisor is especially a best practice. It’s important to understand that while franchising can provide a proven model, great results only come from diligence, execution and hard work. Success or failure ultimately depends on you.
Franchising inelasticity
Franchise systems are governed by the contracts between the franchisor and each franchisee. Often, these agreements contain restrictions that can impact a franchisor’s ability to make changes necessary to meet a competitive threat.
Franchisors may not be able add locations to a market or allow you to relocate your business within a market because another franchisee may have territorial rights that cannot be encroached upon. Also in those states that have enacted relationship laws, franchisors may be limited to what actions they can take against non-conforming franchisees, even if their bad acts are hurting your business.
The restrictions of franchising can be a double-edged sword sometimes—they can make franchising successful but can also be disadvantages to some franchisees. The restrictions may be on the products and services they are allowed to offer; limitations on size and exclusivity of their territory; the possibility of termination for failure to follow the system; the added investment often required for reimaging, remodeling, or acquiring new equipment as a condition of renewal; the cost of transfer and renewal; and restrictions on independent marketing. Also, the added costs for royalties, advertising, additional training, and other services potentially reduce a franchisee’s earnings.
First evaluate whether franchising is for you. Then understand the advantages and disadvantages and see if the disadvantages are something you can live with. Keep what is important to you in mind when evaluating any franchisor and don’t assume that every franchise opportunity is the same.