Last Updated on June 12, 2019 by Tim
Buying a franchise is a popular option for people who want to start their own business with minimal risk. Having a franchise is a way to skip the initial parts of having a business and just go straight to the part where you can concentrate on making a profit. However, not all franchises are made the same, and no matter how excellent their system is, there is still a possibility of failing.
According to franchiseknowhow – food business franchise expert, businesses with franchises can create a lot of jobs as compared to other industries. If you’re someone who’s considering to venture into the franchising industry and help create jobs, you have to look at all your options.
Here is a list of pros and cons when investing in franchise:
- A Working System
Franchise businesses have spent years creating a perfect system for their franchisees. Part of the franchise fee goes to taking advantage of an established system. A system that has been tweaked to perfection will is beneficial for anyone that has little to no experience in running a business. You get to enjoy running your business without the headache of optimizing workflows and other business processes.
More than the operations and processes, you will also have access to their marketing strategy and computer systems. Both of which are very costly if you are to start your own business from scratch. For example, someone who’s working full-time can still manage a franchise business with ease as they don’t really need to do much work once everything is set-up.
- Training And Support
After you sign your agreement, you will be required by your franchisor to attend a series of training. The training could be done online through modules, through a classroom-type setting or on-location at a company owned establishment. The training offered by your franchisor should cover the following:
- Property selection
- Standard operating procedures
- Understanding the operations manual
- In-depth discussion of products and services provided
- Basic business management skills
- How to hire staff for your business
- Customer service and experience
- Safety and maintenance protocol
- Use of company POS and other computer systems
More than the training, you will also get substantial support from the franchisor in case you need it. They will most likely offer you a support line that you could call in case you need help with an issue. Some companies even encourage other franchisees to share their stories with aspiring business owners for support and motivation. Having this kind of support to lean on will greatly increase your chances of success with your franchise business.
- Bargaining Power
Since you’ll be backed up by a big corporation, you’re buying power also increases. This kind of access isn’t available to ordinary small businesses which leave them at risk for paying higher prices. As a franchise, you will gain access to lower rates from manufacturers because of the collective buying power.
- Brand Recognition
When you own a franchise, you also get access to its brand identity and recognition. This is especially true for a franchise that’s been around for many years. The brand recognition can help you with the following:
- Attract customers easily – If a franchise brand awareness is good, you can expect a lot of customers flocking your business. This helps you save money on customer acquisition and marketing.
- Hiring is made easier – Again, since a recognized franchisor is backing you, hiring employees will be a breeze. Finding the right employee for your franchise is an essential factor in your business success.
- Access to Research and Development
Businesses rely on research and development to grow and. The research could be on what other product or services the business could offer or strategies that can help make systems more efficient. As a business owner, having access to R&D will help you succeed faster as you are consistently able to introduce new products to your market and provide better services.
Take, for example, McDonald’s and their Happy Meal. They have a team that spends time on researching what new toys to offer and developing strategies for different territories.
- High Initial Costs
The initial cost of securing a franchise could be very costly. This is because you’re buying a license to use their proprietary resources legally. Most potential business owners tend to underestimate the initial cash-out of a franchise. They end up incurring a considerable amount of debt that can make it harder for them to succeed.
On an average, franchise fees range between 30,000 USD to 50,000 USD. That is just the tip of the iceberg. You have other expenses to consider such as the following:
- Legal fees – If you’re not business savvy, it would be best to hire a lawyer to help you go over the franchise agreement before you sign it.
- Accounting fees – You need someone to help you set up the books and records you need to operate.
- Working capital – This is your initial investment or your day-to-day cash requirement to operate. Your working capital needs to cover you for a specific period until your business can support itself.
- Build costs – Once you’ve secured the location of your franchise, you will need to build the actual place of business. This includes costs for fixtures, furniture, equipment, and signages.
- Inventory – Franchisors will require their franchisees to stock up on inventory along with other supplies before they can start to operate.
- Living and travel cost during training – The training cost should be covered in the franchise fee, but sometimes the training can be in a different place. You should also note that some training can go on for weeks depending on how complex the system is.
- Royalty Payments
This is how the franchisor continues to make money and pay for the operational cost. As a franchise, you will be required to pay the company a percentage of your monthly gross income. The percentage varies from one company to another.
Take, for example, If your franchise earns a 30,000 USD a month on gross sales and the franchisor asks 5% royalty fee, you will need to pay them 1,500 USD each month or 18,000 USD a year.
- No Autonomy
You have no autonomy or freedom in implementing changes. That’s non-negotiable. The rules are there to make all franchises uniform and not to annoy you. However, there are instances wherein you think you could do better, but you have no option but to follow or else you’ll risk being penalized.
You should also understand that the rules they have are also their way of protecting their brand image and reputation. For example, if you’re franchise is into selling coffee products, and you decided that you want to deviate from the recipe. Regular customers will know the difference, and this could risk losing them.
If your business is in a metropolitan city, and you purchased a known franchise, chances are you’ll have competition nearby. Similar franchises within a neighborhood can greatly affect your chance of turning a profit. Some franchisors will not worry about the competition within the immediate area because they will still get profits no matter what the situation is. As the business owner, this kind of competition can be a nightmare for you.
This list should have been able to give you a more detailed look at how the franchising world works. Anyone starting a business whether from scratch or buying a franchise should evaluate the pros and cons. A franchise is just like any other business, it can’t guarantee you success, but it can give you a fighting chance even without the business background.