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Pros and Cons of Buying a Franchise

The Pros and Cons of Buying a Franchise

Franchises are popular for a reason. They can offer lots of comfort and support for business owners who don’t want to reinvent the wheel or start their own concept from scratch, but they don’t come without their downfalls. Here we will discuss what’s good and bad when it comes to owning a franchise. If you are thinking of purchasing an existing business that is a franchise or opening a new franchise concept, these lists will hopefully give you a balanced look at the pros and cons. 

Some of the pros of buying a franchise include:

Having a Proven Concept

New businesses can struggle for years before they get things right, establish the magic formula for success, and become a trusted product or service. With a franchise, they are offering a proven concept. In addition to the quality service or product they sell, they offer owner/employee training, on-going support, software, marketing, etc. All parts of the building blocks for a successful business are provided for the franchisee. 


Established Brand Recognition

Having a name or product that most people know is one of the main reasons that business owners love franchises. For a new business, brand recognition is only possible with a franchise. Brands that are household names don’t start that way and they don’t get that way overnight. It takes years for a business to get brand recognition, so that’s why a franchise is so popular. It’s instant brand recognition when someone opens a franchise, and then they are able to find customers more quickly because of the brand recognition. 


The Ability to Quickly Enter a New Industry

For business owners wanting to jump into a new industry or maybe a line of business that they don’t have much experience in, a franchise is a very safe way to go. They offer training and support for the franchisee, offer employee training, and all the necessary elements so that they can find success in their new endeavor. The franchise will also often assist with location selection, leases, and construction buildouts as well. They essentially hand you the road map, and help you follow it. 


Support from the Franchisor

As mentioned in a few of the pros above, support from the franchisor is one of the biggest advantages of owning a franchise. They offer support in the very beginning from location selection to the construction and design of your location, to the owner’s initial training, and then offer on-going support in various ways. A quality franchisor should be invested in making sure their franchisees are successful, so normally they will do everything they can to help and support their franchisees. 


Existing Corporate Partnerships

As part of the perks of owning a franchise, the franchisor already has existing relationships with suppliers, vendors, and even possible clients. As part of the franchise family, you will enjoy the benefits of those existing relationships.


Less Risk 

A franchise is normally a proven concept and method of doing business. They have a track record of success, and other franchisees have paved the way, showing that success is possible. Before you purchase into a franchise, they have to disclose all of their rules, guidelines, and financial projections via a Franchise Disclosure Document or FDD. This is a federally mandated document that you will need to review for 14 days before signing off on it. Knowing what you are getting yourself into and having a tried-and-true business model to guide you will significantly de-risk starting your own business.  


Network of Fellow Franchisees

Once you are in the “family,” you will be able to connect with fellow franchisees and form relationships with them. Some of them will have great advice for a newbie just starting out, and they will most likely be a wealth of information for you. Being connected to fellow franchisees will also make you feel supported and feel like you aren’t alone. Owning your own business can be a tough challenge sometimes and having a tribe around you who are “in it together” can sometimes be very helpful and comforting. 


Some of the cons of buying a franchise include:


The Franchise Fee/Transfer Fee

There will be a franchise fee (usually a large sum, like $20,000-$50,000) paid for by the original franchisee. For the purchase of existing franchises, a transfer fee (usually several thousand dollars) will need to be paid at the time of purchase. This fee will vary, based on the franchise. Sometimes buyers pay it, sometimes sellers pay it, sometimes they split it. It just depends on the situation and circumstances. 


Getting Approved by the Franchisor

Normally, the franchisor will need to approve the proposed buyer of an existing franchise. This condition should be written into the Purchase Contract as a contingency. If the buyer is not approved by the franchisor, then they should be able to get out of the Contract and receive their deposit back. 


Royalties and Marketing Fees

For most franchises, there is normally a monthly royalty fee and sometimes an additional marketing fee paid to the franchise by the business owner. This is most often a percentage of sales, for example: 6% royalty and 2% marketing. 


Limited Creative Control

Part of the reason people buy franchises is because the concept, processes and procedures, branding, and even training is provided for them. For creative business owners who might want to make changes to any of that, they will face opposition from the franchisor. In fact, the franchisee normally has very limited creative control when it comes to running their business, and they basically have to follow the guidelines and rules provided by the franchisor. 


Territory Restrictions

Most franchises have restrictions on expanding into different areas, and in many cases, a franchisee “owns” a particular territory or geographical area. This ensures that there will be no direct competition for the franchisee unless he or she chooses to open up an additional location. However, for franchisees to move into a different area, they will have to make sure the territory is available and will most often have to pay an additional franchise fee for exclusivity in that particular area. 


Negative Happenings at Other Franchise Locations can Reflect Poorly on Your Location

With the household name and brand-recognition of a franchise, you will get the positive reputation of the franchise, but you could also have to deal with any negative feedback or experiences at another franchise location. Because the public doesn’t necessarily understand that each franchise location is a small business, owned by a real person, one location can often be confused for another, and any location not living up to the expectations of the franchise can hurt the others. The franchisor usually works hard to ensure that all franchisees are operating according to their standards, but things can still happen at other locations that will affect yours. 


Must be on the SBA Approved Franchise List if you Need to Finance

If the buyer plans to use SBA financing, the franchise needs to be registered and approved by the SBA. There is a list on their website.