Why Buy a Franchise?

Advantages

Lower Risks
Most business experts agree that a franchise operation has a lower risk of failure than an independent business. The statistics on this vary depending on the definition of failure. Whatever statistics are used, they consistently suggest that a franchise is more likely to succeed than are independent businesses. The Franchisor can provide you with a proven business model - one that has worked for others.

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Established product or service
A successful franchise opportunity is one that operates using a proven system which has already “been around the block". An independent business is based on both an untried idea and operation. Three factors will help you predict the potential success of a franchise. The first is the number of franchises that are in operation. The second predictor is how long the franchisor and its franchisees have been in operation. A third factor is the number of franchises that have failed, including those bought back by the franchisor.

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Experience of franchisor
The experience of the franchisor's management team increases the potential for success. This experience is often conveyed through formal instruction and on-the-job training.

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Group purchasing power
It is often possible to obtain lower-cost goods and supplies through the franchisor. Lower costs result from the group purchasing power of all franchises. To protect this benefit, most franchise agreements restrict the franchisee from purchasing goods and supplies through other sources.

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Name recognition
Established franchisors can offer national or regional name recognition. This may not be true with a new franchisor. However, a benefit of starting with a new franchisor is the potential to grow as its business and name recognition grow.

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Efficiency in operation
Franchisors already have operating and management efficiencies in place that benefit new franchisees. Operational standards already in place also control quality and uniformity among franchisees.

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Management assistance
A franchisor provides management assistance to a franchisee. This includes accounting procedures, personnel management, facility management, etc. An individual with experience in these areas may not be familiar with how to apply them in a new business. The franchisor helps a franchisee overcome this lack of experience.

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Business plan
Most franchisors help franchisees develop a business plan. Many elements of the plan are standard operating procedures established by the franchisor. Other parts of the plan are customized to the needs of the franchisee.

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Start-up assistance
The most difficult aspect of a new business is its start-up. Few experienced managers know about how to set up a new business because they only do it a few times. However, a franchisor has a great deal of experience accumulated from helping its franchisees with start-up. This experience will help reduce mistakes that are costly in both money and time.

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Marketing assistance
A franchisor typically offers several marketing advantages. The franchisor can prepare and pay for the development of professional advertising campaigns. Regional or national marketing done by the franchisor benefits all franchisees. In addition, the franchisor can provide advice about how to develop effective marketing programs for a local area. This benefit usually has a cost because many franchisors require franchisees to contribute a percentage of their gross income to a co-operative marketing fund.

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Assistance in financing
It is possible, in some cases, to receive assistance in financing a new franchise through the franchisor. A franchisor can often make arrangements with a lending institution to lend money to a franchisee. Lending institutions find that such arrangements can be quite profitable and relatively safe because of the high success rate of franchise operations. The franchisee must still accept personal responsibility for the loan, but the franchisor's involvement usually increases the likelihood that a loan will be approved.

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Proven system of operation
An attractive feature of most franchises is that they have a proven system of operation. This system has been developed and refined by the franchisor. A franchisor with many franchisees will typically have a highly-refined system based on the entire experience of all these operations.

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Disadvantages

Payment of an Initial franchise fee
All franchisors require the new franchisee to pay an initial franchise fee (IFF). This fee can range from a few thousand dollars to $100,000 or more. On average, the IFF ranges between $12,500 and $50,000 with a majority falling into the $25-35,000 range.

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On-going royalty and advertising fees
Franchisors also will typically require a franchise to pay monthly royalty and advertising fees . The fees are a percentage of the gross income from the business. It is usual for the combined royalty and advertising fee to range between 6 and 10%. Some franchisees begin to resent these fees after several years because they have developed experience and built a strong customer base. This success often results in a feeling that the business could continue without the assistance of the franchisor. While this feeling is often misplaced, remember that the franchisor has given you the advantages that non-franchised businesses lack - it still exists.

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Conformity to standard operating procedures
The very nature of a franchise business is to replicate the business plan at every location so that there is a consistency of brand experience regardless of where you may find the franchise. Thus, it is important to understand that for most franchisors, there is just one way to do things, and that is their way. Success results from proven methods of operation, so the franchisor does not want any variations. A franchisee can become frustrated when he or she believes that there is a better way to do things. Though most franchisors encourage its franchisees to innovate, the franchisee cannot implement the innovation unless and until the franchisor approves.

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Inability to make changes readily
A franchisor will prohibit you from selling products or services other than those approved by it. These restrictions may be difficult to follow when you believe that there is strong customer demand for a new or different product. There is often a method for making suggestions, but this can be cumbersome and time-consuming. The franchisee is subject to decisions made in the central office of the franchisor. As a franchisee, you must be willing to limit your independence as an entrepreneur.

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Underfinanced, inexperienced, weak franchisor
It is important to realize that all franchisors are not equal. You may have more to offer the franchisor than the franchisor has to offer you. It is therefore critical that you carefully check the credentials of the franchisor's management team and board of directors. However, do not ignore a franchisor just because the franchisor is new. Doing this may result in the loss of a great bargain. How many people wish they could have bought a McDonald's franchise when Ray Kroc first began selling them?

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Duration of relationship
All franchise agreements have a "term" or length of the contract relationship. This may vary between a few years to 20 years. Once the relationship has begun, there is typically no way to extricate yourself from the contract other than to sell the business. Find out what restrictions exist on selling the franchise to another person. Given the permanency of most franchise relationships, you need to ask yourself whether you want to be involved with the franchisor for the rest of your business career.

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Dependent on franchisor's success
The success of a franchise is usually dependent on the franchisor's success. If the franchise system fails, the franchisee is left without brand support. Carefully examine a franchisor's business plans and financial reports. This will help identify potential weaknesses. When this occurs, the franchisees are unable to control the situation.

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