What are the advantages and the disadvantages of buying a franchise ? (or 10 things you need to know about franchises).
Compared to starting a business from scratch, buying a franchise provides some key benefits :
- The systems are tested and proven. Typically less mistakes are made when starting the business and ramp-up is quicker
- The systems are turnkey : all what is needed to run the business is provided by the franchisor. No need to reinvent the wheel. As a side note, all the expenses needed to start a franchise are well defined in the Franchise Disclosure Document.
- There is a defined brand image and brand awareness is already established. That drives more customers to the franchise vs a non franchised business
- It’s easier to obtain financing. Some franchises are pre-registered with the SBA, which makes getting an SBA loan quicker. Besides, drafting a business plan for a franchise unit is much easier and the business plan is needed to obtain financing.
- The franchisor provides initial and ongoing training and on going support. The franchisee is not alone.
- Territories are generally protected, which limits the competition from other franchisees.
All these benefits provide a beneficial environment for better success.
However there are some disadvantages as well :
- Different fees are due that affect the initial investment as well as the ongoing revenues. The franchise fee is paid when signing the agreement. These are the rights to buy into the franchise. The franchise fee can or not include the initial training. However the biggest factor are the royalties, which are calculated as a percentage on the gross revenue. This can impact significantly the profitability of the business.
- To be successful in a franchise, one needs to follow the system. If one cannot follow a system and is too entrepreneurial, a franchise is not a good choice.
- Typically one cannot stop being a franchisee and go into the same activity as the franchise. There are non compete clauses that prevent that and potential lawsuits as well.
- Not all the franchises are created equal. The best franchises are the ones that provide great systems, training and support and strive to make their franchisees successful.
Evaluating the franchise before purchasing it and doing the due diligence is a very sensitive and important step. One of the most important things, after profitability and great system is ensuring compatibility with the values of the franchise as well with the Franchise staff. Using a franchise consultant is a great help and typically the services are free to the person that is looking for a franchise.
Do you have a business related question that you would like a SCORE representative to address? Email questions to [email protected]
About the Author
Cristiana Jones is a volunteer at Score north central Florida’s chapter. A former supply chain executive, Cristiana started her own business with the support of Score. Cristiana is a Franchise Consultant that helps individuals with purchasing a franchise and business owners with franchising their business.