Is Buying a Franchise a Good Idea?

For those with entrepreneurial minds and hearts, the idea of owning a franchise may come across as a very appealing prospect.

Nowadays, just about any product or service that you can think of is available via one or more franchising operations. The top franchising operations have remained those that deal with fast food – a popular example of these is Burger King. There are also fine examples of franchising operations for products and services as varied as housekeeping (Maids Home Service), repair shops (Meineke Car Care Centre), dance and exercise (Jazzercise Inc.), hardware (Ace Hardware Stores), tax preparation (Jackson Hewitt), and hair salons (Great Clips Hair Care), to name a few.

Statistics from the International Franchise Association estimate that the US has approximately 400,000 franchised locations spanning across 75 industries and hiring a total of 10 million persons. In excess of 2,500 companies in the country offer franchising opportunities. The question that come up is whether an entrepreneur should start his/her business from scratch or buy a franchise.

The Responsibilities of Buying a Franchise Business

A lot of thought needs to go into the decision of buying a franchise business because quite frankly, even though people sometimes think it will be easy, nothing could be further from the truth. It is true that franchisors provide start-up training and progressive support, but the onus is squarely on the franchisee to manage the business – in most cases hands-on management is required. This means that as the manager you will be required to put in long hours, sometimes 60-70hrs/week, hire and fire employees, ensure that the premises remains clean, and handle many dissatisfied customers.

Will You Enjoy Running a Franchise?

A common misconception among people who want to open franchise businesses is that there is plenty of money to be made. To their dismay, they find out that business isn’t as enjoyable as they initially anticipated. The bottom line is that one shouldn’t rush into matters – it is certainly prudent to consider your tastes and preferences and buy a franchise business you can run enjoyably 10-15 years into the future.

Can You Fully Adopt The Franchisor’s System?

Franchising is all about the operation of multiple outlets that are all consistent in the manner that products and services are offered, regardless of the location. People visiting franchises that display similar logos but located on different continents are always assured of being served via a similar system. There are entrepreneurs who are not particularly keen on following established systems but rather prefer to do things their own way – for those people, buying a franchise business may not be such a good an idea.

Dealing With People Is The Heart of a Franchise Operation

Before you purchase a franchise business it is worth examining your capacity and ability to deal and interact with people, including the franchisor and fellow franchisees, as well as your employees and customers. Indeed, a franchise owner known for negative and dissenting behavior can be the reason for the devaluing of an entire franchise network.

The Cost of Acquiring a Franchise

Inadequate capitalization is one of the main reasons behind the failure of many start-up businesses and this handicap also affects franchise businesses in one way or another. In most cases the franchisor offers potential franchisees a general idea about what is required in terms of start-up expenses but these figures could end up varying due to factors like leasehold terms and assorted variables and needs. As far as buying a franchise is concerned, it is best to have a sum of money that will not only help you open the store, but also suffices until profitability is achieved. You are better off starting with surplus capital.

Study the Legal Documents

Franchisors are required to give potential franchisees a document referred to as the UFOC i.e. Uniform Franchise Offering Circular. Within this document is information about the business as well as the franchise agreement that will be signed. This vital document is what directs the relationship between franchisors and franchisees for the entire period of the contract and should be very carefully reviewed, preferably with counsel from a trustworthy lawyer.

How Successful Is the Franchise You Are Considering

You should study the UFOC document to gain valuable insight into the details about the potential success of a given franchise. In the document you will find details about the identities of a franchise’s principal directors, their business backgrounds, and the profitability of their franchise. Seeking the counsel of a credible accountant will help you scrutinize and ascertain the financial viability of a franchise. You will also want to find out how long the franchise has been in operation as this will offer much insight into the capability and experience of the franchisor in setting up and fully developing the system.

Learn From Other Franchisees

Since the UFOC also contains a list of existing franchise owners, it is worth dedicating some time to speak with them with a goal to learn about their experiences running their businesses. Find out what they think about the franchisor and his/her/their commitment to the business, details about franchise training, business profitability, pros and cons, their thoughts on whether buying the franchise is something they would do again, and any words of advice they can offer.

Does Your Family Support Your Decision

It is important for you to secure the support of your family before buying a franchise because, as mentioned, this business type is known to be quite intense and will thus require considerable time taken away from your family and personal time.

Pros of a Franchise Business

  • Established customer base and brand loyalty
  • Strong marketing support in terms of market-ready materials for local and nationwide campaigns
  • Established networks of reliable suppliers
  • Established network of business support
  • Access to competent technical and management training
  • Possible access to financial assistance in terms of loans or other such incentives
  • Access to proven proprietary methods
  • The fact that the franchisor is responsible for developing new products and services through ongoing research and development, thus allowing franchisees to concentrate on their individual business operations
  • You are your own boss
  • The risk of failure is generally very minimal

Cons of a Franchise Business

  • Initial costs in terms of franchise fee and start-up costs can be quite hefty
  • Consistent reduction of profitability potential since a percentage of monthly gross profits needs to be remitted to the franchisor as royalty payments
  • Some contracts are such that franchisees have to pay fees for advertising and marketing services
  • Flexibility and creativity are limited as one always has to comply with the set operation procedures
  • Some contracts stipulate that purchases must only be made from various approved suppliers, some of who may be more expensive than possible alternatives
  • Business reputation and success is only as good as what the franchisor has achieved
  • There is no definite success guarantee – you must employ business shrewdness to succeed just as is the case with any other business venture
  • No business is totally risk-free

For more information about buying a franchise you can refer to: http://business.ftc.gov/documents/inv05-buying-franchise-consumer-guide

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