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Pros & Cons of Franchises
Buying a Franchise
There are many pros and cons to owning a franchise, but typically franchising is a great way to get started in owning your own business. When you purchase a franchise, you are purchasing a business format. Your fees pay for the product, trade names, operating procedures, quality assurance standards, management consulting support, and facility design among other things. Some well known franchises are Subway, McDonalds, Service Master, The UPS Store, Blimpie, Great Clips, etc.
Some things to consider when choosing a franchise:
1. Pick a business concept you are interested in and preferably have some prior knowledge of.
2. Choose a franchise that has financing options that make sense for your situation. Will you need to take out a loan? Will they finance you directly?
3. Do some research on your location. What’s needed in your county, town, neighborhood? You don’t want to pick a franchise that rents surfboards if you live in Nebraska.
4. Be aware of royalties and fees. Get a complete financial picture of projected sales and expenses to see if it’s financially attractive to you.
Some of the advantages of franchises are:
Branding – Brand equity and awareness are already established.
Minimal Risk – Franchises have proven business models.
Training – Even if you’ve never had prior experience in the industry, most franchises will set up a regimented training program to learn the industry and operations to be a successful owner.
Support – Most franchises offer their franchisees support systems for problem solving, training and other support needed to be successful.
Financing – A lot of franchises will offer financing plans to get the business up and running. You may not have to come up with all of the capital to get a business started.
Advertising & Marketing – Most of the marketing and advertising materials and placement are done for you. Promotions are designed for you and in-store materials are provided.
Some disadvantages of owning a franchise:
Franchise Fees – Initial franchise fees are to be paid to the franchisor to get the business started. These fees can range from thousands of dollars to hundreds of thousands of dollars.
Royalties – Franchises will require you to pay royalties to them on all sales, this is how they make money. Sometimes these royalties make it harder for the franchisee to make a substantial amount of money compared to owning their own independent company.
Limited Control – Most franchises in return for providing you with their successful business model will not readily give up control of their brand. Franchisees typically have a lot of rules and procedures that must be followed.
Required Purchases – Some franchises require franchisees to purchase uniform materials or product to make sure all franchises are uniform.
Termination – Franchises can keep control of all termination rights. They may have the ability to terminate their contract with you and give the franchise to someone else.
Non-compete – Franchises will typically have you sign a non-compete clause in your contract stating that you will not start a similar business while you are running their franchise and for some time after termination of contract.