People become small business owners through several methods. Some inherit a family business when a parent or relative retire. Others launch an innovative new product and find themselves running a company without ever planning on it. But for some, those with money to invest upfront, they intentionally enter the small business world by becoming a franchise owner.
When you buy a franchise, you could be buying the right to use a parent company’s name, to sell their products, or to offer their services. The parent company often retains some control, whether it’s by setting prices across their franchisees or standardizing product offerings.
For some, investing in a franchise takes the work out of coming up with an idea or building a brand. Others chafe at those restrictions, or at paying a royalty to a parent company. If you’ve been thinking about becoming a franchisee, consider these pros and cons.
Pro: Name Brand Recognition
Some small business owners want to get a headstart on getting their business off the ground. With a franchise, you’re buying a known name with an established reputation that can attract customers from the day it opens.
Common franchises like sandwich shops, coffee stores, or fast food restaurants have names that are instantly recognizable. Because of this, you won’t have to work as hard to establish your business in the community or build sales.
Con: Parent Company Control
For many people, they dream of becoming a small business owner because of the control it offers. They dream of setting their own hours and escaping the nine to five grind. But with a franchise, you’re not fully in control of the business you own.
Corporations that franchise, such as McDonald’s® or Subway®, put together the menu and set prices for your area. You can’t decide that you want to charge a dollar more for a hamburger than a franchise in the next town over. Breaking the rules, or failing to follow agreed-upon protocols, could cost you the franchise.
Pro: Advertising is Done For You
All small business owners have strengths, or aspects of running the business that they enjoy more than others. If you don’t have the expertise to market your business or sell your products, a franchise could be a good fit.
The franchisor often takes care of local and national advertising. They’ll purchase ad spots on radio, television, or billboards in your area. A creative team in their corporate offices designs the logos and campaigns, and you can concentrate on other aspects of your business.
Con: Franchise Fees and Royalties
However, you will pay for the advertising that the franchisor performs on your behalf. Franchise fee structures vary but you typically pay a large sum to open the business, then ongoing fees and royalties or a percentage of sales. That initial sum typically averages between $20,000 to $35,000.
If the advertising campaign created by a team in another state doesn’t appeal to shoppers in your neighborhood, you still have to pay into the advertising pool. When sales rise, so does the amount you pay to the franchisor. Some franchises have set monthly fees, say $500, that you have to pay regardless if you made any money that month.
Make sure that you include these fees when having your accountant draw up a business plan or review the financials of any franchise that you’re considering purchasing.
Pro: Buying Power
If you’re a small business just starting out, it’s hard to negotiate terms with vendors. Without an established credit report, or Dun and Bradstreet report, they probably won’t extend credit. And you won’t be able to buy in enough bulk to get discounts.
With a franchise, the buying power of your store is lumped together with that of all the other franchises. Your parent company negotiates contracts with vendors, hopefully getting you the best deals on supplies. Vendors will extend credit and/or offer bulk discounts because you’re buying with other franchises or under the parent company umbrella.
Con: It’s Difficult to Exit the Business
When you sign a franchise agreement, you sign a legal contract. It has enforceable clauses and an end date. If you opened a sandwich shop on your own and it wasn’t doing well, you could close or sell the business. It’s not as easy if you own a franchise.
Franchise agreements may prohibit reselling or transferring the franchise agreement, or only allow it if the franchisor approves. You could be forced to complete a contract and keep a business open even if you’re losing money. Have a lawyer and and an accountant review all contracts and financial commitments before you sign.
There’s a lot to consider when it comes to buying a franchise. It could be an easy way to become a small business owner if you have the cash available for the initial investment. Just be sure that you have a good grasp of the pros and cons, and know what you can live with, before you go into business with a franchisor.