The professionals at Franchise Clues weigh the top pros and cons of franchising in today’s article.
When it comes to the advantages and disadvantages of franchising, you should weigh both carefully to ensure you're doing right by your business.
With the Bureau of Labor Statistics reporting that approximately 20% of independent businesses close after two years, while franchise consulting firm FranNet reports that 92% of franchisees were still going strong after two years, franchising is a fantastic model for most. But is it the best option for you?
In this article, we'll cover all you need to know in order to make that call.
The Advantages of a Franchise
One of the biggest benefits of a franchise is that it comes with built-in support. Most franchisors offer comprehensive training, support, and marketing campaigns that help franchisees get off the ground.
Franchisors also provide a well-known brand name that makes it easier to draw in customers and establish a strong reputation. When buying a franchise, you’re given a degree of security because you’re investing in a proven business model: you can rest assured that the franchisor has already done the legwork to make sure that the business is profitable.
Additionally, franchises often give owners access to exclusive deals with suppliers and vendors that can help them save money and grow their business.
When you become a franchisee, there is also the list of franchisee benefits to account for. Here are just some examples of what you can expect:
The Franchise Disclosure Document (FDD): As a franchisee, you'll receive a Franchise Disclosure Document (FDD) from your franchisor. This disclosure document holds important information about your franchise opportunity, like details about the franchisor's business history and its financial performance. It also includes information about any past legal issues or concerns.
Financing Options: Many franchisors offer financing options to help franchisees cover the cost of getting started. This can include loans, grants, or other forms of financing.
Location Assistance: Your franchisor may help with finding the right location for your franchise, including assisting you with site selection, lease negotiations, and other real estate-related matters.
The Disadvantages of Owning a Franchise
When it comes to franchising advantages and disadvantages, both should be weighed equally – no matter how appealing the benefits may be.
Arguably the biggest disadvantage of owning a franchise is that you’ll have to pay a franchising fee, as well as ongoing royalties to the franchisor. This can be a hefty sum and can eat away at your profits.
You’ll also have to adhere to the franchisor’s rules and regulations when it comes to running the business. This can limit your ability to be creative or make autonomous changes to the operations in order to increase profits.
One of the most surprising franchise disadvantages, however? The ongoing fees and royalties. Franchise royalties are typically collected by your franchisor on a monthly basis. Like any marketing fees incurred, these fees are based on a percentage of your revenue. Franchise royalties range from 4% of your revenue all the way up to 12% or more, and the amount has to do with the type of franchise business.
Lastly, if the franchisor decides to close down the franchise, you’ll be out of luck and will have to start over from scratch.
Key Factors to Consider When Evaluating a Franchise Opportunity
Are you evaluating a franchise opportunity? Then consider the following components:
Cost: You'll need to consider the cost of the franchise and whether you can afford to make the investment. What is the initial investment? What about its profitability potential? All of these factors are crucial to determining whether you can afford this business model and how likely it is that you’ll earn that money back.
Brand: Franchises come with a variety of brands, so it's important to consider which brand is most likely to generate customers for your business. Is it in an industry that’s a growing market? Ask yourself if it has a proven sales record or a track record of repeat business? Does the franchise have a good reputation generally?
Support: Franchises often come with a variety of support services and resources that can help you get your business up and running quickly and effectively. What systems does this franchisor have in place to help your business get up and stay running?
Territory: The territory that you will be able to operate in is important to consider when evaluating a franchise opportunity. Is competition steep where you are? Alternatively, what variety can your franchise add to your area to make it more appealing to new customers?
Type: There are three types of franchises: single-unit, multi-unit, and market. Single-unit franchises are when you own and operate only one franchise location. This can be a good option for you if you want to start small and test out the franchise model before potentially expanding in the future.
Multi-unit franchises, on the other hand, are when you own and operate multiple franchise locations. This can be a good option for you if you have experience in the industry and want to expand your business quickly. Lastly, market franchises are when a company grants the rights to a franchisee to operate in a specific geographic area, which is helpful for focusing on specific markets.
Personal Interest: Last but certainly not least is personal interest. If you aren’t passionate about your business, it will show in your profitability–so be sure to choose one you’re eager about!
How to Research a Franchise Opportunity
Before you make a decision, you should do thorough research on the franchise you're considering. This includes researching the franchisor, the franchise system, and the industry.
You should look into the franchisor's history, the franchise's success rate, the franchise's current support system, and the industry's growth potential.
You'll also want to meet with current franchisees to get an accurate picture of the franchise. They can tell you about their experiences and give you insight into any issues or problems they may have encountered.
To do this, we recommend breaking it down into six simple research steps:
Conduct market research through Internet searches or franchise expos
Narrow down the franchise brands you’re considering
Apply to your desired franchises to see if you have the qualifications the franchisor is looking for
Do your due diligence by reviewing your Franchise Disclosure Document, interview other franchisees in your area, and run financial projections
Visit your franchise’s HQ to learn more about the business model
And lastly, to make your decision about which franchise is best for you
Need help getting started? Our Franchise Opportunities silo breaks down franchising opportunities by industry, brand, investment level, and even states to ensure that you find the perfect fit for your skillset, interests, and goals.
Where to Find Support When Considering Franchising Advantages and Disadvantages
Weighing the pros and cons of owning a franchise is no easy task. That’s why we recommend seeking out professional support and consultation wherever you can.
Franchise consultations, for example, are 100% free–and their job is to learn what your ideal business looks like.
From there, they’ll investigate available franchise opportunities and help you refine your list to the most desirable choices. Typically, franchise consultants receive a commission from the franchisor you choose, so their services are free to you.
As far as consultants go, you’d be hard-pressed to find a more knowledgeable and enthusiastic team than our crew here at Franchise Clues. e work to maximize both growth and returns for all of our teams and franchisees. The seven brands in our portfolio have locations all around the globe and are leaders in their respective industries, each with impressive financial performance.
Our mission is to transform the traditional franchise development value proposition that owning a franchised business is a safer path to entrepreneurship. Instead, our professionals value franchising – not only as a chance to develop an income stream separate from the traditional employer-employee relationship but more as an opportunity to develop skills through repeated interaction with peers and franchise coaching support.
At its most effective, franchising harnesses the power of networks and fosters human development through entrepreneurship… and we believe that there’s a franchising model out there for everyone.
Franchising can be a great way to start your own business and enjoy the benefits of being part of a larger system. However, you’ll need to make sure you're doing your due diligence and researching each component of both the franchise and the franchisor to determine the best type for your specific goals and skill set.
Luckily, with the right research – and the right professional support – evaluating the advantages and disadvantages of franchising has never been easier. Are you ready to take the leap?
Javier is an experienced franchise industry professional with a focus on development, operations, and performance. With almost a decade of experience in the industry, he has witnessed both the successes and failures of franchise owners. Javier strongly believes that buying a franchise is not just an investment, but a life-changing event that presents a unique opportunity for personal and professional growth. He enjoys helping aspiring franchise owners navigate the decision-making process and increase their chances of success.