Pros & Cons of Buying a Franchise Business
One of the primary motivators for owning a franchise is it allows you to go into business FOR yourself, but not BY yourself. That’s because you are buying into a proven business model leveraging an established brand with a built-in customer base. But franchising is not for everyone. Even though you are an owner, you must give up some independence. And it requires a significant capital investment to get started.
Instead of having to reinvent the wheel, a franchisee gets a lot of support from the franchisor right out of the gate, offering a better chance for success. A franchise owner often receives help from:
- Site selection for optimal traffic with consideration for locations of competitive businesses
- Design and construction of physical facilities
- Financing to cover initial franchise fees plus start-up costs
- Training to learn the business and proven operational methods
- Grand opening programs to jump start the business
- National and regional advertising to grow sales
- Routine business operations to maintain best practices for optimal efficiency
- Access to bulk purchasing agreements from approved vendors to hold down operating expenses
- Ongoing supervision and management support if you run into problems or have questions.
This turnkey structure helps to lower risk, compared with starting your own business from the ground up. And it’s helping to overcome common obstacles that are faced by many but even more so by women and minorities wanting to run their own companies, namely, a lack of business experience and access to capital. This is why the International Franchise Association reports that an increase in women and minority franchise ownership is one of the positive trends in franchising today.
All that support from the home office is designed to take the guesswork out of running the business. But for some entrepreneurs, it may feel a little heavy-handed and result in a frustrating lack of independence. Some franchisors exert more control than others, so if you’re looking for a business in which you can be creative, innovative, and apply your own personal touch or set your own pricing, make sure the franchisor is willing to give you that level of freedom. Otherwise, franchising may not be the best choice for you.
Cost is another factor. It’s not cheap to get a franchise up and running. Franchising capital requirements vary widely depending on the industry, but they basically fall into three buckets:
- Franchise fee. This is the up-front fee you pay for the right to become a franchise owner. A recent study by FranData, a research and information company focused on franchising, showed the average franchise fee across all industries was $35,185. But fees can be as low as $15,000 for a Subway franchise, to well over twice that for a large, family-style sit-down restaurant.
- Start-up and operating expenses. This is the capital cost to build and supply the physical business, including property, equipment, signage, inventory, advertising, insurance, payroll, and more. Franchisees generally need financing to cover these expenses, which can run well into six figures for most industries, and into the millions for others, such as the lodging industry. Some franchisors provide assistance with financing.
- Royalty payments. The franchise brand receives a percentage of the gross sales from every franchise under its umbrella. Every year. This is the big ongoing income stream that motivates business owners to consider franchising their brand. The FranData study found that royalties vary quite a bit, from an average of 4.47 percent for sit-down restaurants to 6.98 percent for some automotive companies. In dollars, the average royalty paid by franchisees across industries was about $35,000 a year. Sometimes, there is a separate royalty fee just to help offset advertising costs.