Is owning a franchise right move for you? Here are the Pros and Cons...
If you're considering making a go of being your own boss and would feel comfortable working within an established network of like-minded entrepreneurs, then franchising maybe an option worth pursuing.
Franchising is a form of business in which an owner, or franchisor, grants license to distribute products, services, or methods of business to affiliated dealers, known as franchisees. U.S. franchises generate in excess of $1 billion in annual revenue and account for more than 40 percent of the nation's retail sales volume.
Most people are familiar with McDonald's, 7-Eleven, and similarly well known franchising companies, however, the industry has grown to include scores of other types of businesses. In fact, most of the nation's franchisors operate small-business systems.
The International Franchise Association or IFA is a good source of information to help make an informed decision to be a franchise owner.
Here are the pros and cons to consider from IFA:
- Owning a franchise allows you to go into business for yourself, but not by yourself.
- A franchise provides franchisees with a certain level of independence where they can operate their business.
- A franchise provides an established product or service, which may already enjoy widespread brand-name recognition. This gives the franchisee the benefits of a pre-sold customer base, which would ordinarily take years to establish.
- A franchise increases your chances of business success because you are associating with proven products and methods.
- Franchises may offer consumers the attraction of a certain level of quality and consistency because it is mandated by the franchise agreement.
- Franchises offer important pre-opening support: site selection, design and construction, financing, training, grand-opening program
- Franchises offer ongoing support: training, national and regional advertising, operating procedures and operational, assistance, ongoing supervision and management support, increased spending power and access to bulk purchasing
- The franchisee is not completely independent. Franchisees are required to operate their businesses according to the procedures and restrictions set forth by the franchisor in the franchisee agreement. These restrictions usually include the products or services which can be offered, pricing and geographic territory. For some people, this is the most serious disadvantage to becoming a franchisee.
- In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees.
- Franchisees must be careful to balance restrictions and support provided by the franchisor with their own ability to manage their business.
- A damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into an unforeseen problem.
- The term (duration) of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination.
Many franchising operations require an initial investment of considerably less than $50,000, making them ideal for individuals Iacking significant startup capital.
Franchising startup costs can vary widely, however, from $3,000 to more than $3 million. The lowest industry average is about $12,000 for a real estate franchise. Startup costs increase significantly from there, depending on the industry and a host of variables.
In addition to startup fees, franchise owners may be required to make ongoing Royalty payment of as much as 8 percent to 10 percent of revenues. Other costs can include operating licenses and insurance, fees enabling a franchisor to promote new outlets, and contributions to a national advertising fund.