For many entrepreneurs, franchising is a way to start a business with an established brand name in the marketplace. There are several pros and cons to franchising that every entrepreneur should understand before getting involved in a franchise agreement. Research a franchise opportunity completely to determine if it is the right business for you. Always have a Franchise Attorney review all documents. Do your due diligence including speaking with 8-10 franchisees, including ex-franchisees. The chances for success of a franchisee is much greater than someone doing it on their own. However, you have to do extensive “homework” first. Realize that you probably won’t get rich with only one franchise.
A franchise company has spent years establishing a brand name and finding effective marketing programs. As a franchise owner, you would have the benefit of using that experience to help your business grow. The franchise company spends the money on market research, and you as a franchise owner would be able to apply that information to your marketplace and increase your revenue.
A franchise is based on the concept of taking a proven business method, and then applying that to multiple locations. For example, a franchise can be based on a way to cook a hamburger that has already generated significant revenue. As a franchise owner, you do not need to develop a successful business method. You only need to apply the franchise business method to your business to begin generating revenue.
In most cases, a franchise will offer a franchise owner a territory to work. That territory will be the sole domain of that franchise owner, and the franchise owner will not have to worry about the company setting up another location within his territory. A territory is normally set by geographic boundaries and varies depending on the franchise company. The franchise owner still will have competition from other companies, but he will have the support of his franchise company within his territory to help improve his chances of success.
Before signing a franchise agreement, discuss territory protection with the franchise company. We had experience with a quick oil change franchise where the territorial protection was a half-mile.
Lack of Flexibility
With a franchise agreement, the franchise owner is told how to run his business, how to lay out his location, what vendors to use, how to train his employees and in some cases what hours his location needs to be open. Because the franchise company has a set way of doing business, this means that the franchise owner doesn't have the freedom to run his business as he pleases.
Your franchise location image is tied to the image of the franchise company. If the company experiences a financial or product-related scandal, your franchise will experience lost revenue just as other franchises will. In some cases, your business can lose money for elements that are out of your control.
Fees required to start a franchise can be expensive. On top of location costs, labor costs and the cost of supplies, there is also the cost of the franchise license and the ongoing percentage that the franchise takes either monthly or quarterly. The hotel industry charges the highest average initial franchise fees. An average hotel franchise, including licensing and location fees, can cost as much as $6 million to start, according to Bond's Franchise Guide. The average franchise royalty fee per month for any kind of franchise can run from 3-8 percent of total monthly sales, according to the website Franchise Prospector. (1)
Entrepreneur(2) magazine annually ranks America’s top franchise opportunities. Here are examples of startup costs, which include franchise fees, for some popular franchises:
Their number one franchise of the year is Hampton Hotels, with estimated startup costs of $3.7M to $13.5M.
You may find a Subway restaurant more within your price range at $85,000 to $260,000.
Want to own a travel agency? Cruise Planners-American Express Travel franchises can be started with as little as $1,600 to $20,000.
- Gaebler : "Why Buy a Franchise?"(3)
- Startup Nation: "Franchise Business Pros and Cons"(4)
- Quint Careers: "Franchising Pros and Cons;" Randall S. Hansen(5)
- Franchise Prospector: "The Costs Involved with Being a Franchise;" Tracy Barbour(6)
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