Think of your favorite fast-food restaurant — are there multiple locations? Is it even available in different countries?
If you answered yes to both, this is likely because it’s a franchise. There is an original business owner, but independent parties have bought into the business and opened their own locations. So rather than one person managing hundreds and maybe thousands of sites, each store may have a different manager, but they all follow the same rules.
People choose to take part in this type of business model because they want to develop business experience without the risk of starting a small business from scratch.
If you’re considering this option for yourself, it’s essential to be aware of the pros and cons before deciding. In this post, we’ll lay out the advantages and disadvantages of owning your first franchise that you can use to make your choice.
What are the advantages and disadvantages of franchising?
As a refresher, a franchise is a business where an independent party (a franchisee) buys into an existing business venture from a franchisor and opens their own location. Let’s discuss the pros and cons of making this decision.
Advantages of Franchising
1. Little to no industry experience is necessary.
While it’s essential to have business acumen, no specific industry experience is required to purchase a franchise. You’re buying into an established business, and the franchisor will provide you with industry-relevant training that will help you develop the necessary skills to succeed at the job.
In the same vein, an additional advantage to purchasing a franchise is that it allows you to explore a career in an industry that you’re curious about without committing to it with your own business.
2. Existing customer base and brand awareness.
One reason people choose to purchase a franchise is that it comes along with an existing customer base and brand awareness that is often tough to quickly develop for a new, small business.
With a franchise, the target audience is already established and active, and since they know what to expect, the decision to do business with you takes less time. As a result, it also takes less time to begin generating profits.
Existing brand recognition also makes it easier for you to attract employees and talent.
3. Lower risk than starting an entirely new business
Purchasing a franchise comes with a lower risk than starting a new business, as the trial and errors of new ventures have already been worked through. With a franchise, you’re working with proven strategies and implementing a process that works.
4. Support from the franchise owner.
Franchisors provide support and training to franchisees to ensure you understand their business model and how the stores operate. In addition, their years of experience will help you build business acumen under their guidance, something not often available if you start your own business.
5. Ample opportunities for expanding your business to different franchise locations.
Another benefit to buying into a franchise is that you have ample opportunities for growth and expansion within the same franchise.
If you’ve found success and enjoyed the process, you can open new locations while still benefiting from the franchisor’s support. You’ll likely also have demand and brand awareness in all the different locations you choose to expand to as well.
Disadvantages of Franchising
6. Limited creative opportunities.
When you start your own business, you have the creative freedom that is not available when purchasing a franchise. You’ll likely have to adhere to the company’s existing rules, so creating a unique marketing mix or designing a unique logo are not options in this business model.
7. Financial information is shared with the franchisor
Financial information is always shared with and available to the franchisor.
If you’re looking for more freedom with finances, this wouldn’t be as possible as it would if you were running your own business. However, this may be an advantage to some, as the franchisor can provide guidance and financial advice if there are issues, again helping you learn from an experienced owner.
8. Varied levels of support.
Franchisors will likely provide support, but some may not. Some may be there every step of the way, while others may give you the essentials and send you on your way.
If you’re purchasing a franchise to learn from an experienced leader, but they don’t provide much, you may struggle more than you’d hoped. Given this, it’s essential to review the contract before signing and understand the level of assistance you’ll get.
9. Initial investments and start-up costs can be expensive
Depending on the business, initial investments can be high. For example, fast-food chain McDonald’s requires a minimum investment of $500,000 USD of non-borrowed personal resources to be considered. This means they expect you to have that much cash on hand that is not from a loan. To some, this kind of investment is not possible.
In addition to initial investments, some franchisors may charge rent if you’re purchasing an existing storefront, require you to handle marketing costs, pay management fees, recruitment costs, service fees, royalties, etc. It can be a significant investment, which can be a drawback to those beginning their business career.
10. Contracts aren’t permanent
When you purchase a franchise, you’ll be required to sign a contract that stipulates a time frame for your ownership. When it ends, the franchisor may decide not to renew your contract. While it likely wouldn’t come as a last-minute surprise, it would require you to spend more time looking for the next venture.
For some, a temporary contract may be an advantage. When the contract ends, you can use your experience with the franchise as a springboard to starting your business.
11. You’re your own boss, but you have less individual control
As mentioned above, you don’t have as much creative freedom with a franchise.
You also don’t have individual control of any other aspects of the business, like opening hours, products, holidays, or even storefront layout. Franchisors have these rules in place to promote consistency in all their businesses, which is why many regulations are strict and not open for interpretation.
So, while you are your boss as you would be for your own business, you’re expected to comply with existing standards.
Benefits and Cons of Franchising: A Summary
If you’re hoping to generate knowledge and build your skills while supported by experienced mentors, buying into a franchise is a valuable option.
If you’re looking to embark on your own journey with more control, it may be best to start your own business. The table below displays the most salient benefits and cons to consider when making your decision.
Advantages of buying a franchise
DISADVANTAGES OF BUYING A FRANCHISE
No prior industry experience is necessary, so it is good for career exploration if you’re unsure.
You own the franchise and are your boss, but creativity and independence are limited because you must adhere to franchise rules and regulations.
Brand awareness already exists for the business, making it easier to draw in an audience and generate profits.
Initial investments can be high, and some companies require payment with non-borrowed money.
You’re buying into an established brand with operations, systems, and processes in place to help you succeed.
Costs can add up if you’re required to pay rent, royalties, service fees, etc. If you don’t have access to capital, this can become a burden.
Ample opportunity to purchase multiple franchise locations and expand your operation.
All financial information is shared with and available to the franchisor.
Franchisors provide hands-on support and guidance.
Not all franchisors provide the same levels of hands-on support. If you lack any sort of business experience, it can be challenging.
Lower risk than starting a business from scratch.
Opening a Franchise Should Depend on Your Business Goals
Purchasing your first franchise should come as a result of your own business goals. Consider the benefits and drawbacks outlined in this piece, and make a decision that will allow you to meet your goals.
Originally published Aug 30, 2021 5:00:00 AM, updated August 30 2021