The Pros and Cons of Franchise Ownership
If you are looking to open your business, taking the plunge into the entrepreneurial world can seem quite daunting. A franchise can be a great way to mitigate some of the risk, providing you with proven systems and a great support network. Of course, the franchise model does come with drawbacks, however. When deciding whether to open a franchise, you need to fully weigh the positives and the negatives. What are the pros and cons of franchise ownership? Let’s break it down.
PRO: Great training. Opening your own business can seem like a pretty daunting task, especially if you don’t have any experience as an entrepreneur. The great thing about franchising is that the vast majority of franchisors provide franchisees with some kind of formal training system. The specifics of the training system vary significantly between franchisors, but in most cases you will be able to get at least the basics down before you open up shop.
PRO: A pre-established system. A great thing about purchasing a franchise is that is comes with a ton of pre-established business systems, so you don’t need to reinvent the wheel. From marketing plans to operating systems, your franchisor will have a range of different systems in place — systems that have been proven to be both effective and efficient. You don’t have to go through endless periods of trial and error to figure out what works and what doesn’t. Your franchisor has already done all of that for you!
CON: You’ve got to play by the rules. Of course, it is incredibly advantageous that franchises come with their own set of systems. However, that also means you have to play by the rules. And franchise systems come with quite a good deal of rules. They are necessary to standardize qualities and operations across franchise networks that often literally span continents. That’s the reason a Big Mac tastes the same whether you have ordered it in Boston, Wichita, or Shanghai. For example, you will likely need to purchase all of your supplies and products directly from your franchisor. So if you are a McDonald’s franchisee, you need to purchase your french fries from the McDonald’s headquarters — even if you think there is a better, cheaper option to be found.
PRO: A terrific support system. When you become part of a franchise, you gain access to a terrific support system. After all, your franchisor wants you to succeed and is ready to let a hand should you need help. An invaluable part of this support system is other franchise owners. They have experience dealing with the problems and glitches you are most likely to encounter and can subsequently offer great advice. “The franchisee network is so important that if I was authoring the franchise operations manual, I would highlight the fact that there is a network of like-minded franchisees ready and willing (for the most) to assist you. They’re the ones with the answers,” explained franchise expert Joel Libava. “They’re the ones who have probably experienced the issues that you’re just beginning to experience.”
CON: Ongoing royalties. So those great systems, valuable franchise network, and terrific support systems? Well, they aren’t free. Gaining access to the resources of a franchisor comes at a cost. Not only will you need to pay a franchise fee (typically somewhere in the ballpark of $30,000), you will also need to pony up ongoing royalties. That means that you will need to pay a percentage of your gross sale to your franchisor every month. This percentage varies depending on the specific industry, but it is typically anywhere between 5 percent and 12 percent. That can add up pretty quickly. For example, let’s say that your franchise is doing $50,000 a month in sales. That would mean that you are putting a check in the mail for $2,500 each month. That’s $30,000 a year!
Article by Jason Duncan, CEO/Founder of ManagerComplete.com. ManagerComplete is an online software application that helps multi-unit franchises manage operations effectively. Follow him on Twitter for latest updates.