Anyone considering going into business for themselves usually comes to a fork in the road and must answer these questions; Should I buy — or start from scratch — a company and go it alone? Or, will I be better served by purchasing a franchise and becoming part of a broader enterprise?
Of course, the ultimate question is; Which option offers me a greater chance of success? Before proceeding too far in your quest for business ownership, you’ll want to consider the potential plusses and minuses of operating a franchise.
Pros of Franchising
- Recognized brand name: If working with a franchise operation, it’s likely many consumers will already know your name and reputation. And, that’s just for starters. Many franchisors will help you with marketing programs, websites, SEO or Search Engine Optimization, pay-per-click ad programs, signage designs and more! Everything up to an including caller “on-hold” scripts for when prospects wait to speak to a rep! All this home office branding and marketing support can help you stay top-of-mind in your in your local area.
- Established business systems: Most franchise operations will assist with the operating, computer, marketing and other systems needed to make your business a success. This is no small consideration. It saves you the trouble of investigating them on your own, setting them up and eventually getting up to speed on each. You’ll also avoid any “dead ends” (and makeovers) if choosing the wrong one, only to discover your mistake a year or two down the road.
- Supportive training programs: Many educational opportunities offered by networks start the day you sign your franchise agreement in the form of online training modules. They’re often supplemented by formal classes you’ll attend at the franchisor’s headquarters. Either way, you’ll “hit the ground running” with education support that’s not available to independents.
- Proven technologies: Most franchisors have evaluated and implemented technologies for accounting, payroll and other processes networkwide. As a franchisee, you will not be “plowing new ground.” Instead, you’ll begin benefitting from these technologies almost immediately. Another plus? Software purchases are often negotiated by the network at a discount, and the saving opportunity is passed on to you.
- Extensive support systems: Encounter a problem? Need some advice? With a franchise network, you’re not alone. Many franchisors operate helps desks, provide IT assistance, and field teams of representatives who make periodic visits to franchise members. Often former franchisees themselves, these field reps are often invaluable sources of hands-on expertise.
- Franchise networks: In addition to the many resources mentioned above, a franchisor offers you something no independent business can: camaraderie. At annual conventions and other network functions, you’ll meet other franchisees much like you. They’ve encountered your struggles. Solved your problems. And, are likely to share with you their solutions. In many such situations, new and lifelong friendships are formed.
Cons of Franchising
- Franchise fees: This one-time, up-front expense is the cost-of-entry. It gains you access to all the pros described above. But, it’s not inconsiderable. Typically, today’s franchise fees range from $20,000-$50,000.
- Ongoing royalties: Franchise members pay the franchising organization a percentage of their gross sales each month. Franchise royalties range from 4% of your revenue all the way up to 12% or more. But, what does a 4% royalty look like on a practical basis? Let’s say your franchise sales are $30,000 each month, of which you’ll send the franchisor $1,200. Multiply that over a year’s time and the network has collected $14,400 from you!
- Rules and regulations: Many entrepreneurs open a business with the belief they’re finally going to do things their own way. Not so with franchising. Which each operation differs, some are quite strict. The fact that a Big Mac ® tastes the same from one city to the next is no accident. A definite set of standards apply. “Freelancing” recipe-wise is not allowed, let alone encouraged!
- Purchase agreements: Many franchise owners are bound by the original contract to buy supplies and products from the franchisor. Find a better deal elsewhere? Or, prefer to support a fellow local business owner you’ve met at a Chamber of Commerce meeting? Sorry. It’s not always allowed.
- Marketing fund fees: It will come as no surprise that marketing support described above is not free. Among many franchising organizations, the marketing fund fee is often stipulated as a percentage of monthly sales ranging from 1 to 3 percent.) This is in addition to the royalty. But, is it worth it? You’ll have to decide or at least make this a key question when interviewing other franchisees during your due diligence before signing on. Many such programs are remarkably effective in drawing new prospects or generating sales leads. Others are not.
- Pre-sale approvals: Selling a franchise is not as straightforward as moving on from an independent business. The franchisor will want to approve the buyer, potentially limiting your list of prospective purchasers.