Many of the most renowned and profitable businesses in America are franchises. In the fast food industry, McDonald’s, Subway, and Pizza Hut may come to mind. You’ve probably also heard of 7-Eleven, UPS, and Hilton Hotels. The franchise model has allowed these companies to become global brands, and they are always looking to expand.
Buying a franchise is an attractive option if you’ve always dreamed of being a business owner but don’t want to start from scratch. What’s more, with the support of the franchise company, you won’t have to deal with the challenges of running a business alone.
If purchasing a franchise interests you, read on to discover the pros and cons of becoming a franchise owner and operator.
What is a Franchise?
A franchise is a popular business model that licenses an individual or group to use a company’s name and sell their products or services in a particular area. In exchange for an initial fee and ongoing royalty payments, the franchisee gets access to a trademark, a proven operating structure, and ongoing support from corporate headquarters.
For the franchiser, each new location brings enhanced brand recognition, a larger customer base, and a greater portion of the market.
Why Should You Buy a Franchise?
Working for Yourself
Maybe you like the idea of being an entrepreneur, but don’t have a solid business idea. The benefit of buying a franchise is that you get to start your own business without having to come up with an idea, conduct market research, and bear the risk of trying something new.
Overseeing the entire enterprise, from initial site selection to daily operations, will take hard work, but most business owners will tell you how fulfilling it is to start a company and see it grow.
A Lower Risk
The idea of building your own small business can be appealing, but there are greater risks involved with a startup than a franchise, particularly when it comes to establishing proof of concept. Opening a franchise isn’t entirely without risk, but it is often the best path for more cautious entrepreneurs.
When you buy a franchise, you’re also buying into a proven concept and business model. You can follow the company’s roadmap in bringing your business to market, and tap into an established brand and customer base.
You’ll still have some difficult times, but when you buy into a franchise, you’ll benefit from a significant support system dedicated to growing the brand and seeing you succeed.
Pre-Opening and Ongoing Support
Purchasing a franchise may be the right step if you’re a first-time business owner or if you lack industry expertise, because you won’t be doing it alone. One of the benefits of opening a franchise is the pre-opening support you will get from the franchiser, including training you in how to set up and operate a business. Typically, franchisers also assist with site selection and design, training employees, and a grand opening.
Corporate support won’t stop once you’ve opened your doors. Many companies have a call center or support personnel to help franchisees with managerial duties, advertising, daily operations, and purchasing. What’s more, you’ll have access to a network of franchise owners from which you can get business advice, tricks of the trade, and moral support.
Profit numbers usually depend on the type of franchise, but there is potential for healthy profits in the franchise industry. Of course, profitability also depends on how you offset your costs.
Fast food enterprises are the most popular franchises to purchase due to lower startup costs, but restaurants often deal with smaller margins than hotels, fitness facilities, or personal services. That said, Entrepreneur compiles an annual list of the top 500 franchises to buy based on financial strength, stability, growth rate, and size, and this year’s top ten list includes five food franchises.
What Are the Drawbacks to Owning a Franchise?
Startup Costs and Royalties
Investing in a franchise may cost less than financing your own startup, but first you need to qualify. Because the fast food industry makes up the largest portion of franchised businesses, let’s take McDonald’s as an example.
To be considered as a franchise owner, you typically need a minimum of $500,000 in non-borrowed assets and must be able to make a down payment of 25% on the purchase price. In addition, you must pay an initial franchise fee—essentially the cost of access to the brand—of $45,000. Once you’ve opened your doors, you’ll pay McDonald’s your monthly rent in addition to a monthly royalty fee of 4% of total sales.
Ultimately, it costs between $1 and $2 million to open a McDonald’s restaurant. Depending on the franchiser, you may be obligated to cover a range of other costs, including your business license, insurance, advertising, equipment, and supplies.
Loss of Autonomy and Creativity
Franchises are successful when they offer brand consistency. To that end, franchise owners must be able to toe the company line by adhering to the rules and best practices set by headquarters.
For example, if you’re entering the fast food industry, expect your franchiser to retain control over the menu, from your ingredients to your daily specials. Marketing campaigns for a new product are often implemented from headquarters and are run nationwide, so your catchy tagline may not make it onto your store’s signage.
Lack of Control
Franchises draw in many people with dreams of owning their own business. While franchise operators run most of the business, corporate headquarters still controls some important aspects of your enterprise, including:
- Which suppliers you work with: some franchisers get incentives or rebates from suppliers in exchange for requiring exclusive relationships with their franchisees. Although corporate headquarters benefits, you may wind up paying more than market value for inventory and supplies.
- When you can renovate: your location may need repairs or a facelift, but franchisers typically tackle renovations on a store-by-store basis, and you might have to wait if you’re at the bottom of the list.
- New locations: some franchisers open multiple stores in a geographical area in the attempt to increase profits and squeeze out their competitors. You might see regional sales grow as profits for your individual location suffer.
- Ending your franchise agreement: the franchiser may retain the right to terminate your franchise agreement, meaning your ownership rights can be removed for reasons such as underperformance or missing royalty payments. The term of your contract is usually limited to 10-15 years, and the franchiser may choose not to renew it.
Do Your Research
Running a franchise or a group of locations can be a fulfilling, lucrative career, but it’s not for everyone. Like any business opportunity, don’t rush into buying a franchise. Speak with other franchise operators, do your research, and take the time to evaluate whether it’s the right path for you.
Would you like to own a franchise?