July 16, 2019  
 
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Franchising

 

The Pros and Cons of Buying a Franchise

Franchising can be a great way for aspiring entrepreneurs to enter the game with less risk and less up-front capital. However, franchises are not risk-free investments and many have shown to be more problems than the owners ever could have anticipated.

Franchising has become a popular way for businesses to grow fast.
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Franchising allows franchisees to open their own business using the marketing and brand name of an established firm in exchange for an up-front fee and annual royalties. Some very well established companies such as McDonalds, Subway, and Jiffy Lube, have franchised their stores as a way to expand nationally. The benefit to the parent corporation is it costs them much less to expand through franchising while allowing independent business owners to manage their stores. It's like having a CEO at every store location nationwide, since businesses owners are much more likely to care for their stores and businesses than an employed store manager.

Franchising also became very popular with want to be entrepreneurs and small business owners who saw franchising as a less-risky entrance into owning and running their own business. Most franchises can be purchased for far-less than starting your own business and since you are the owner, you have direct management over the operations of your franchise. Some franchises have proven extremely profitable for their owners, especially if you own a McDonalds, Burger King, or Subway. Below are some pros of franchise ownership:

Pros:

1. Own your own company
2. Some allow for absentee ownership
3. Marketing dollars invested by parent corp
4. Buying into a strong brand
5. Stable revenues & cash flows
6. Low cost to enter (some as low as $10,000)

However, franchise ownership also comes with its drawbacks, some much worse than others. For starters, franchise owners have limited flexibility with how they can operate their franchise. All franchises require franchise owners to follow a set of written guidelines with very limited room for flexibility. So, although it is true that you are your own business owner, it comes with many strings attached with regards to how you can run your own business.

The more frightening aspect of franchise ownership is the franchise owner's inability to control what the parent company does. The worst horror story I heard of while researching franchise ownership was the problem faced by numerous Quiznos franchise owners. As Quiznos expanded nationally to compete with Subway, they began opening stores in the same territories as already established Quiznos resulting in cannibalization of sales at the existing locations. Some franchise owners saw their revenues fall as much as 50% due to the proximity of another Quiznos in their territory. Many franchise owners sued Quiznos for their franchise practices and one franchise owner took it so far that he committed suicide because he was facing financial disaster from the profitable Quiznos he operated that become unprofitable after Quiznos opened a newer store location in his territory.

Some limitations and potential cons to owning a franchise:

Limitations & Cons:

1. Dependent on rules set by corporate
2. Little to no control over parent company decisions
3. Requires strong personal financial record
4. Credit Score > 650
5. Liquid Investments of > $75,000
6. Net Worth Requirements
7. Must pay % of sales to parent to cover national marketing & advertising

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