Want To Buy a Franchise? What are the Pros and Cons?

Buy a Franchise – sounds good right? But what are the pros and cons of such a major financial and lifestyle decision. Take a look at the my discussion of the factors below and consider your personality. Will you really fit into the franchise business model – it is not for everyone. Also consider whether you would get a better return on your money by buying an existing business. This approach comes with some of the benefits of buying a franchise, without some of the more onerous and expensive disadvantages of buying a franchise.
Your Business Mentor Ray has owned franchises in several different systems and also independent start up businesses, I will share with you some of my thoughts on a recent article about the pros and cons of buying a franchise. The author is Joel Libava, the President of Franchise Selection Specialists Inc., and a respected writer on the topic of franchising. His latest book is called “Become a Franchise Owner!” and is available on Amazon.com.

Here are the ‘Pros’ when you buy a franchise as listed by Mr. Libava:

  • “Business Operating Systems – Operating system: This is the system developed by the franchisor that enables the business to be easily replicated by franchisees.  This includes standard operating procedures and methods. By getting an already-established operating system, it means you don’t have to start from a blank sheet of paper creating everything yourself for your business.”

Think of this buy a franchise ‘Pro’ as sort of the ‘secret sauce’. With a franchise you will find the means to quickly get up to speed with sales, to train yourself and staff, plan a marketing budget and source your product or services. This can ‘Pro’ can also be found when buying an existing successful business, You step in as the owner with customers, sales and staff already going strong.

Training programs and experienced trainers -

  • “Formal training program: Good franchisors provide good training to franchisees.  This usually includes classroom-style training at corporate headquarters. Franchisees are taught things like pre-opening procedures, daily operations, marketing techniques, hiring practices, software use, and more. There’s usually on-site training also, right at the new franchisee’s location.”

The quality of this buy a franchise ‘Pro’ varies greatly from one franchisor to another. Some deliver well on this benefit, others give it a try to get you opened and then after that there are very little resources devoted to training you and your staff as you get more experienced and require advanced training. Some Franchise companies will say that their annual ‘franchisee conference’ is the place for this to take place.

In my experience with several different franchise companies … this is not a benefit for the more experienced (open 2+ years) franchisees. It usually provides benefits for the newbies – especially if the franchise company is growing by adding many new units per year. Just a side note – all franchise owners are required to pay for the annual conference per their franchise agreement – whether they attend or not.

This ‘Pro’ is not readily transferable to the idea of buying an existing business instead of a franchise. In some cases, the selling owner will stay on for a while to provide ‘training’, this is a very hit or miss type of thing and varies greatly from situation to situation. If the existing business you are buying has an experienced management team that may the best resource for training … if they stay with the new ownership.

Marketing and Advertising Resources

  • “Specific marketing and advertising plan: Part of the general business plan, the franchisor will have a proven, detailed plan that allows its franchisees to rapidly get to market with their products or services. … ”

This ‘Pro’ of buying a franchise can be very valuable. Advertising is very expensive. It is quite easy for a new business owner to waste a great deal of time and money testing various advertising sources. With buying a franchise you receive a business plan, a marketing plan and specific ad copy to get you started. If fact many require you to spend a certain amount or % of sales per month on advertising.

In addition, the franchise company will take a percentage of your sales (2% to 10%) to fund the franchisor’s national advertising campaigns. These campaigns may or may not benefit you in the location you establish your new franchise business. In my experience many these ‘national’ marketing campaigns best served the franchisor to sell more units and not the local operating units. This really varies greatly by type of franchise and national scope of operations. For example, owners of Dunkin Donuts benefit greatly from the regional ads run by the franchise company. But the owners of a local plumbing franchise may not benefit at all from any national campaigns.

The ability to buy you products at the lowest cost:

  • “Product supply line / purchasing power:  When the franchisor buys products that the franchisees will use or sell, there’s a discount involved, because the franchisor is really purchasing these goods on behalf of  a large number of franchisees.  The franchisor has bulk buying power.  This makes it tough for an independent business to compete on price with the franchisee. 7-Eleven (over 36,000 stores worldwide) is one franchisor that does this quite well.”

This can be a very real benefit compared to if you buy a business. Getting your main products at a very favorable price helps your gross profit margin and can offset a small part of the fees associated with owning a franchise. Be sure to carefully read the FDD (Franchise Disclosure Document) to make sure that the franchise system does not require you to buy goods or equipment from them or their preferred suppliers. This can many times end up costing more than locally sourced goods.

Many independent businesses can join trade groups or buying co-ops to gain much of the same buying power as is offered by the franchise group. Be sure to spend a lot of research time on this as the cost of goods sold is a big expense item on your profit and loss statement.

Support Services

  • “Support staff: Usually based at the franchisor’s corporate headquarters, the support staff can help franchisees with whatever problems they are experiencing. These support areas include, marketing, technology, sales, real estate, and operations. Some franchisors have field reps that go out to visit and assist franchisees at their locations.”

This ‘Pro’ can be quite beneficial. Business owners often feel somewhat isolated and alone when it comes to business problems. Many problems just cannot be discussed with your staff and others in your family just may not understand the issues involved. So having a network to call on is really a great resource. In fact, I have found that your fellow franchise owners in the system can become a great source of support and ideas.

Here are the ‘Cons’ when you buy a franchise as listed by Mr. Libava:

  • “Rules:  Part of the attraction of the franchise business model is of course, the system. For a system to work properly and effectively, the users of the system must follow it closely. The franchise operations manual contains pages and pages of rules that franchisee’s must follow.For instance, if you’re a franchisee of Ace Hardware, there will be certain items that you must carry in your inventory. If you invest in a Seattle’s Best Coffee franchise, you’re going to have to be open certain days and times. You’ll also have to purchase and use the technology that the franchisor has chosen. Everything that you’ll need will be disclosed to you, before you sign the franchise contract.“

Of course following the rules is part of the franchise model and can be a big ‘Con’ when you decide to buy a franchise. If you are a person who is not willing to take specific direction and in some cases orders then buying a franchise is not for you. The penalty for not following the rules will be termination of your franchise and the loss of all the money you paid to be a franchise owner. Please read and fully understand all the conditions set out in the FDD and the Franchise Agreement. You must have an small business attorney with franchise law experience review the documents.

Another ‘Con’ aspect of owning a franchise is that most franchise companies set at least annual sales goals for your business. These are important to the franchise company because they charge you royalties and advertising fees based on a percentage of sales. They want to be sure that you are growing your sales and thereby growing their royalty fees each year. Failure to meet the sales targets will result in termination of your franchise and a great loss of money to you.

Difficult to understand Franchise Agreements and FDD

  • “Complex legal documents:  All franchisors that are registered in the United States must have a Franchise Disclosure Document (FDD).  All franchise buyers must be presented with the FDD before they are permitted to purchase a franchise business. There are 23 items listed in this document, including specific information about the executives of the franchise, litigation, start-up costs, franchisee obligations, franchisor assistance, and information about site selection, territory restrictions, and more. The actual franchise contract is included in the document, and it’s written in fairly complicated legalese.”

This particular ‘Con’ of buying a franchise can be handled by your lawyer, but only if the lawyer is fully experienced in franchise law and the understanding of the FDD. Do not attempt to handle this on your own, or with a generic business lawyer. Another aspect here the ability to negotiate any of the terms and conditions, very few franchise companies will allow substantive changes to their franchise agreements. This is definitely not to your advantage.

On the other hand if you are buying an existing business the legal documents are prepared by you and the seller through negotiations and can be much less complicated and unilateral. Buying an existing business however does require significant due diligence regarding sales figures, expenses, liens and potential litigation.

Your Reputation is tied to the Franchisor’s reputation

  • “Reputation management:  Your local reputation is only as good as your franchisor’s. If the franchise brand runs into trouble, you will probably suffer at the local level. Case in point:  a pretty distasteful video that two employees of a local Domino’s Pizza franchise filmed, was posted on YouTube in 2009. Things got so bad that the president of Domino’s decided to film an apology and put it up on YouTube, himself. Dominos franchisees were definitely affected by this negative publicity.”

This is a ‘Con’ because you have no control over the possible bad results of things happening elsewhere with the franchise company or the other franchisees. I always think of the poor souls who owned BP gas and convenience franchises after the recent BP Gulf of Mexico oil spill. They will blamed by association with the BP name and really could only suffer as a result. Without Big Name recognition you might make fewer sales, but you also will not suffer from someone else getting a bad reputation.

Limits on your Creativity

  • “Limitations on product/service offerings:  If a franchisee owns a franchise like SignsNow, he or she is only allowed to sell signs, banners, and related sign materials. If the franchisee wants to add window cleaning services to the business, if it’s not in the franchise agreement, then it’s not going to be permitted.”

Here again the ‘Con’ is something that will not effect you during the early years of operating your new business. As time goes on and the uniqueness of your creativity or the special needs of your local market, will be calling for you to do something that may be great for your bottom line but not permitted by your franchise agreement. In many ways buying a franchise is like buying a boss.

The ability to think through the possibilities long term over the usual 10 year length of a franchise agreement is very important. Our business world today is quite a bit different than it was 10 years age – think about it!

Your Business Mentor Ray has presented to your a short list of the Pros and Cons of buying a franchise. Take these and match them to your needs and personality to see how strong a match up is made. Talk to some franchise owners just about the experience of being in a franchise system. Ask at the end if they would do it again and why or why not. I think you will find that many small business owners would welcome to talking to you and sharing their experiences. What does a franchise really cost?  Both in terms of dollars and restrictions

Answer this question before trying to decide which franchise to buy. Buy a Franchise or buy an existing business?

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