Buying a franchise has its benefits and negatives. Like with anything in business, buying a franchise does not guarantee success. What you can get in return for buying a franchise is a system, processes, brand recognition, refined business model, economies of scale. That said, there are of course just as many drawbacks and limitations. It can be limiting, more expensive and there is the issue of perpetual royalty payments.
You are essentially purchasing a business that has an established brand, business model as well as economies of scale from the franchisor, all of which has value. Depending on your circumstances, buying a franchise may make sense but is essential to understand the potential pros and cons of buying into a franchise so that you can make an informed decision.
The benefits of buying a franchise
Avoid starting a business
When you buy a franchise, you generally avoid the entire startup stage of a business. This is the awkward period of time where you as a buddy business owner set up a business from just an idea, organise the branding and put in countless hours just to get the business started. Make no mistake, you will still need to do your research and put in many hours prior to buying a franchise and many hours once you take it over.
The main differences are you don’t need to set up the branding as there should be some goodwill in the franchise. This isn’t always the case as sometimes there are franchises for sale which are essentially new territories which doesn’t have any goodwill. Each case is different and you need to perform your due diligence prior to purchasing a business or franchise.
Refined business model
Buying a franchise can help you get your foot in the door to a business with a business model that is refined. A good franchise should have an existing customer base that wants the brands’ product or service. Franchisors such as McDonalds spend millions of dollars per year refining their product and service so that store near can draw their customers time and time again.
Having a franchise can give you access to a name that customers can recognise from all across your state or nationwide in Australia. This obviously holds value and brand recognition is definitely something to look for when you are purchasing a franchise. Brand recognition is one of the components of goodwill and it is definitely something to consider prior to signing the dotted line.
Systems already set up
Most people are not extremely technically savvy and would need to outsource the setup of systems and other technology if they were to start their own business. Having access to systems should be part of buying into a franchise. As stated earlier, not all franchises are created equally and some will have modern state of the art systems whilst some with none at all.
Processes and procedures
Another aspect of a franchise which has value are the process and procedures. McDonalds is infamous for their rigid but efficient processes. If you are looking at purchasing a franchise, it is a good idea to learn how their processes work.
The ideal franchise should have trainers or mentors to help new and existing franchisees to ensure that franchisees and their staff are properly trained at every location or outlet. These new employees will be brought up to speed quickly with the systems, processes and procedures in your business.
Marketing and advertising
As an owner of a franchise, you will still need to be active in marketing your business. Being part of a large franchise will give your business the ability to take advantage of the companies larger marketing and advertising budget. Large franchises routinely advertise online, TV and radio on a national scale which can be uneconomical for a small business.
Easier to finance
Buying a franchise may be easier to finance through the banks compared to buying a standalone business. This is because the banks generally see franchises as less risky than business. They may be more willing to finance the purchase of a franchise but at the end of the day, it depends on your circumstances and the business or franchise that you are purchasing.
Large franchisors have the ability to buy goods in bulk and in turn supply franchisees stock and goods for cheaper than if the franchisee were to purchase it by themselves.
The negatives of buying a franchise
Higher set up costs
Buying a franchise will generally be more costly than buying a standalone business outright due to goodwill attached to the brand. There is also commonly an additional franchise fee associated with the upfront costs of setting up the franchisee.
Strict rules set by franchisor
Many start or join a business to be their own boss but when you become a franchisee, you need to abide by rules which are set by the franchisor. Many have strict rules set in place to ensure that franchisees don’t tarnish their brand. Buying into a franchise will mean that you have no choice but to comply with the franchisors rules whether you agree or disagree with them.
Arguably the biggest downside to owning a franchise is the ongoing royalty payments which varies significantly depending on the industry and franchisor but royalties are commonly around the 5-6% mark according to Forbes. Royalties can make a difference to the bottom line for franchisees, especially if they are operating with a business model that has thin margins.
Franchise agreements are written by the franchisor’s lawyers and serve to protect the franchisor more so than franchisees. Franchisees may be contractually obligated to spend lots of capital to update their store based on the direction of the franchisor. Breaking contractual obligations stipulated in the franchise agreement can result in the loss of your franchise licence/business.
Issues with reselling
When a franchisee intends to sell their business, the franchisor has the right to veto the sale. Some franchise agreements don’t allow the franchisee much flexibility in selling the franchise and require them to sell it through head office along with their additional fees. This can make it extremely difficult for a franchisee owner to sell their franchise or capitalise on any value that they added during their ownership.
Negative press from brand
A franchisee will benefit from positive promotions and marketing campaigns associated with the brand but also suffer any negative press that is associated with the brand. According to FranchiseED the franchisee will inversely suffer from any negative PR caused by other franchisees or the franchisor and in simple terms – bad publicity is bad for all franchisees.