INVESTING IN A FRANCHISE: Pros and Cons

investing in a franchise

You should research the franchise thoroughly before investing the tens of thousands of dollars required to purchase one. It is crucial to know what a franchise is and how it differs from a chain or a standalone business. Having a franchise does not function similarly to having a business based on your original idea.

Investing in a Franchise Business

A franchise is a business with one or more owners that follows the same guidelines and uses the same name as its parent corporation. As part of ownership, the company offers its franchisees assistance with marketing and inventory management in exchange for fees from the franchisees.

According to the International Franchise Association, a franchise is “a method of distributing goods or services involving a franchisor, which establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and frequently an initial fee for the right to operate under the franchisor’s name and system.”

What Types of Franchises Are There?

There are five main categories of franchises, and each offers different opportunities and considerations to make.

#1. Job Franchises 

These businesses frequently have little startup costs and overhead, and some may even be run from homes. Most of the time, just a few supplies or tools are required. Franchises that provide cleaning services, lawn care, and child care are examples of this kind of service.

#2. Product-selling franchises 

The franchisee is responsible for marketing the franchisor’s products in these business setups. Franchisees that sell products frequently only get the franchisor’s brand and no infrastructure. Companies selling soda, appliances, and cars are just a few examples of common product franchisors.

#3. Business format franchises

The most common franchises have a business plan because they significantly lessen the workload for the franchisee. The franchisee has access to all franchisor’s systems, including marketing, operations, and training. Franchises for fast food and business services are among the most common.

#4. Investment franchises

Investment franchises are those that demand franchisees to put up their capital. This can be done through financial compensation or by granting the franchisee the ability to choose and manage their management team. Well-known chains of restaurants and hotels are two examples.

#5. Conversion franchises

Franchises with conversion-focused business models essentially also have an acquisition element. It means the franchisor buys businesses that compete with them and turns them into franchise locations. The company can continue by utilizing the franchisor’s technological capabilities. Due to reduced competition, franchisees may multiply, and franchisors may profit more.

How to Buy a Franchise

If you’ve decided that investing in a franchise is the best course of action for you, start by doing the following:

#1. Have faith in your ideas.

Running a franchise or any business may tax the body, the mind, and the bank account. Before you commit to a franchise purchase, be sure of your motivations. If you think running a franchise will be easier than running any other business, keep in mind that every business faces challenges.

#2. Research any franchises you might be thinking about buying.

Even the most well-known franchises might not be the best ones for you. Consider the local market in which your franchise will operate and the connection between the parent company and its franchisees carefully before making your choice.

#3. The application process needs to begin.

The first stage in the application process is choosing a franchise. It could be wise to seek legal advice in this case. You will be screened the same way franchises were screened during the application process.

#4. Call a meeting to discuss “exploration day.”

A potential franchisee would frequently meet in person with a franchise’s corporate headquarters before the COVID-19 outbreak. Before committing to buying a franchise, you attend this event, which is usually known as the “discovery day,” where you may get to know one another better and ask any questions you might have.

#5. Request money.

The majority of franchisees will need money to launch their businesses. For many people, bank loans are frequently the best option.

#6. Please carefully read your franchise documents and return them.

Due to the length and ambiguity of these contracts, you may find it advantageous to seek the advice of an attorney to help you navigate this process.

#7. Invest in real estate or rent one.

At this step, you will already have chosen the town or city where your franchise will be situated. It’s time to permanently leave your house and buy or rent a property for your business.

#8. Ask for guidance and help.

You are associating yourself with a reputable organization that has a name, a slogan, a set of guidelines, and products. You will make this move to cement your position inside the industry.

Pros and Cons of Investing in a Franchise

To summarize, a franchise is a business in which a third party (the franchisee) purchases a stake in an already established company from a franchisor and installs its location. Let’s talk about the benefits and drawbacks of investing in a franchise.

Benefits of Franchising

#1. Little to no prior industry experience is required.

Although general business expertise is needed, buying a franchise does not require expert industry understanding. You are investing in a trustworthy company, and the franchisor will educate you about your sector and assist you in building the skills you need to be successful in your position. The ability to investigate a career in a field without committing to it with your own business is another benefit of buying a franchise.

#2. The brand’s recognition and customer base.

One of the reasons individuals choose to buy a franchise is because it is typically difficult for a new, small firm to build a clientele and name recognition quickly. The target market for a franchise is already established and actively engaged. Since they know what to anticipate, choosing to work with you is more straightforward because they understand what to expect. As a result, starting to make money happens more quickly. Finding talent and employees will be simpler if your brand is well-known.

#3. Less dangerous than launching a new company

Buying a franchise entails less risk than founding a new company because the challenges of new endeavors have already been experienced. With a franchise, you are using tried-and-true tactics and following a tried-and-true procedure.

#4. The franchisee’s assistance.

To ensure that franchisees are informed of their business plan and how the stores work, franchisors offer support and training. You would develop business acumen under their direction thanks to their years of expertise, something you wouldn’t have access to if you opened your own company.

#5. There are many chances to franchise your firm in new areas.

The availability of development and expansion opportunities inside a single brand is another advantage of purchasing a franchise. If you were successful and liked the experience, you are still eligible to receive help from the franchisor when opening more stores. There will undoubtedly be demand in each new market you decide to enter brand awareness.

Adverse Consequences of Franchising

#1. Fewer chances for creativity.

Owning your own company gives you the freedom to be innovative, which is not available if you buy a franchise. In this business model, developing a distinctive brand or marketing mix is not an option because you will probably have to adhere to the company’s current policies.

#2. The franchisor receives a disclosure of financial information

The franchisor is continually given access to and informed of economic facts. It wouldn’t be as easy to achieve greater financial freedom as if you owned your own business. To some people, the franchisor—who can offer advice and financial support if there are problems—might be helpful because it allows you to learn from a more seasoned owner.

#3. Various help levels

Even though the majority of franchisors offer support, some might not. Some would give you what you need and send you on your way, while others might travel with you. You can have more difficulties than anticipated if the franchise you buy doesn’t offer you much management training from an experienced manager. This makes it crucial to carefully study the contract before committing and comprehend the level of support you’ll get.

#4. The start-up and initial investment costs could be high.

The initial investments may be considerable, depending on the company. For instance, McDonald’s fast-food restaurant mandates a minimum commitment of USD 500,000 in non-borrowed personal assets. Based on your response, they expect you will have that much cash on hand, free of debts. This kind of investment may be beyond the means of some people.

Some franchisors may charge rent if you purchase an existing storefront and are required to pay for your marketing expenses, management fees, recruiting expenses, service fees, royalties, etc., in addition to the initial investment. It could need a sizable expenditure, which could be detrimental to people just starting a business.

#5. Contracts are not always upholdable.

You must consent to a contract outlining the terms of your ownership when you buy a franchise. Once your contract has expired, the franchisor may decide not to renew it. Although it wouldn’t likely be a surprise at the last minute, it would give you more time to look for the next business. A short-term contract could be advantageous for some people. You can launch your own company using your franchise experience after the contract expires.

#6. You lack self-control even if you are your boss.

As was already mentioned, working for a franchise restricts your creative freedom. Furthermore, you have no personal influence on any other facets of the company, such as the goods, special occasions, or even the layout of the storefront. Due to the franchisors’ need to ensure uniformity across all of their businesses, many standards are stringent and cannot be misunderstood.

As a result, you still need to follow established rules even if you are your boss and manage your own business.

Is It Worth Investing in a Franchise?

You may have thought, “Are franchises a good investment?” if you’re a budding entrepreneur or an established businessperson looking to diversify your holdings. Yes, it is a straightforward response, mainly if a fantastic opportunity arises. There is a clear appeal to launching a business by purchasing a franchise.

What Franchise Is the Most Profitable to Own?

The most lucrative franchises are:

  • 7-Eleven.
  • Planet Fitness.
  • JAN-PRO.
  • Taco Bell.
  • Orangetheory Fitness.
  • Great Clips.
  • Mac Tools.

Is Investing in a Franchise Profitable?

Franchise purchases may appear to be a simple way to make money, but the royalties and fees will quickly reduce profit margins. The majority of franchise owners make under $50,000 annually.

Do Franchise Owners Get Rich?

Owning a franchise has the potential to make you independently wealthy, but this is not a given. Even with the perfect business in the right sector and any prior entrepreneurial experience or riches, your ability to generate revenue may still be somewhat constrained.

Are Franchise Owners Rich?

In the United States, franchise owners make an average pre-tax income of nearly $80,000 per year, according to a Franchise Business Review* poll. Though 51% of franchise owners make less than $50,000 annually, only 7% do.

Is Owning a Franchise Passive Income?

Franchises can provide passive revenue, no doubt about it! A lot of franchises are created to generate passive income. Due to this, some franchisees wind up owning many locations of the same franchise, each of which has a different staff and requires little management.

What Are the 4 Types of Franchising?

Four franchise company models to consider investing in:

  • Job or operator franchise. 
  • Management franchise.
  • Retail and fast food franchises. 
  • Investment franchise.

Conclusion 

Franchise ownership can be rewarding, but research is essential before making any decisions. Do your homework, calculate your potential profit, and consider your financing possibilities. It is recommended that you get the advice of legal counsel as well. This method will make getting a franchise as easy as possible for you. 

References

0 Shares:
Leave a Reply

Your email address will not be published.

You May Also Like