Blog | Entrepreneurship

Pros and Cons of Buying a Franchise

What You Should Consider Before Buying a Franchise

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As a method of doing business, franchising has far expanded from its early incarnations of gas stations and auto dealerships into almost every good and service imaginable.

Entrepreneur magazine puts out its Franchise 500 list each year. Here are the top 10 franchises picked for 2018: McDonalds, 7-Eleven, Dunkin’ Donuts, The UPS Store, RE/MAX LLC, Sonic Drive-In Restaurants, Great Clips, Taco Bell, Hardee’s, and Sports Clips.

Franchising is seen by many as a simple way to go into business for the first time. But franchising has no guarantee of success and the same principles of good management - such as informed decision-making, hard work, time management, having enough money and serving your customers well - still apply.

Even the truest of the true believers in franchisees will caution that owning a franchise does not mean freedom from dedication and effort. You are still running a business. You’ve got to make it work.

If you are on the fence about buying a franchise, here’s a list of benefits and drawbacks to help you decide.

PROS

  1. Brand recognition - A franchise is an established business with existing customer loyalty with a national presence. Franchisors require franchisees to contribute to a national “marketing budget.”
  2. Uniformity of business operations - Parent companies provide extensive support to the franchisee. A lot of franchises are turnkey operations that include equipment, supplies and training, making it easy for the franchisee to start the business in a shorter amount of time.
  3. Share volume buying power - Franchises typically enjoy collective buying power advantages that are immensely beneficial in terms of maximizing margins.

CONS

  1. Buying a franchise means entering a formal agreement with your franchisor - If the franchise is not successful, it is usually a complicated and expensive process to terminate the franchise contract.
  2. Little room for creativity because the franchise agreement dictates how you operate - The flip side to the benefits of the uniformity of business operations, franchises usually cannot deviate from how the parent company has established its operations.
  3. Buying a franchise means ongoing sharing of profit with the franchisor - Typical costs, such as franchise fees, royalties, etc. add up to a high potential cost of buying and operating a franchise. Also, while most franchisors provide extensive ongoing support, in some systems the support from the parent company may be limited to just setting up the business.

Franchise Disclosure Document

The last element for considering whether a franchise opportunity is right for you is to evaluate the Franchise Disclosure Document, sometimes called the Uniform Franchise Disclosure Document. In this document, you will become aware of all the fees involved in owning a franchise, and they can be quite substantial.

There are twenty three key information categories disclosed in the FDD. It’s useful to consider the importance of each one. Here are some examples of what is disclosed in the FDD:

  1. The Franchisor
  2. Management
  3. Litigation
  4. Bankruptcy
  5. Franchise fees
  6. Franchisee’s initial investment
  7. Purchase requirements
  8. Approved supplier specifications

There are 15 more considerations. But these will give you a clear picture of what you’re buying into. As you review the FDD, the problem areas, if any, will be identified. But also be aware that the FDD is not reviewed by a governmental agency. While the information is required to be disclosed there is no requirement that someone is reviewing it for accuracy.

In the end, when acquiring a franchise, you are still buying a business. You still need to do your due diligence, ask the right questions, take the prudent precautions and make the right decisions.

To learn more, read my book Buying & Selling a Business available on Amazon.

Original publish date: September 05, 2018

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