One of the options for those who want to own a business is to buy a franchise. When you purchase a franchise, you are basically buying the right to operate a retail location under an established brand. Often, people think of food establishments, like McDonald’s (MCD) or Subway when they think of franchises. But it is also possible to open a franchise for home goods stores, clothing and cell phones.
With a franchise, you own and run the store. However, you get to use a well-known name and you receive some support and resources from the corporate headquarters. Buying a franchise can be expensive, though. Different brands come with different costs, so you need to do your homework ahead of time. Additionally, it is important to understand the pros and cons of buying a franchise.
Advantages to Buying a Franchise
Perhaps the biggest advantage to purchasing a franchise is that you pretty much have a turnkey system in a number of cases. You are provided with set inventory, a specific way of doing things and you are “plugged in” to advertising efforts for the whole chain. When you buy a franchise you are instantly part of a recognizable brand that probably already has marketing materials, advertising and more. Other advantages of buying a franchise include:
- Access to inventory: In many cases, you have access to standard inventory. You might even have access to it at discounted prices. This can provide you with the ability to offer products that people already recognize and trust. Plus, there is a quality control aspect associated with accessing ready-made inventory.
- Equipment rental or purchase plan: Some franchises offer you the ability to rent the equipment you need or some of it might come with your start-up package. Other franchises offer a reasonable purchase plan so you have access to what you need. It makes the costs associated with getting the necessary trappings a little more manageable.
- Hiring processes and HR support: It can also be helpful to have a lot of the legal aspects of hiring and working with employees already worked out. Plus, as a franchise owner, your business name is recognized and can be easier to attract better employees. Make sure you understand the hiring practices at the chain. Often there is a handbook that can help you make the right choices and the right time. Having a process to follow can be extremely helpful.
If you struggle with marketing and if you are unsure of where to start when it comes to a business, a franchise might not be a bad idea. This is especially true if you feel overwhelmed by all the processes. A franchise that provides you with step-by-step setup help and continuing support, can be a good choice.
Downsides to Buying a Franchise
A franchise isn’t for everyone, though. One of the biggest drawbacks to a franchise is that you are rather limited. You have to follow specific rules and meet certain requirements — or risk having your franchise taken from you. You will have to conform to the corporate standards and practices of the franchiser. This is not a business model for the fearless innovator. You aren’t supposed to change things up; you’re supposed to fit in with corporate culture.
On top of that, you will need to pay money to the franchiser. You have to raise the capital to buy the franchise to begin with (some franchises cost more than others) and you will have to pay royalties to the franchise every year. It’s possible to be required to pay in excess of $500,000 just to secure a franchise; you’ll probably need a loan for that. Then, there is the yearly fee paid to keep your franchise active. If you make a lot of money, this isn’t a big deal. But if can’t turn a profit, this becomes problematic.
In some cases, you might not get the support you need from the corporate office. In those situations, the franchise can be difficult to maintain. The fact of the matter is that you are still the business owner, so you are responsible for solving most of the problems — and responsible if you continue to lose money.
Before you buy a franchise, it’s a good idea to research the opportunity. First of all, think about your business style. If you want to own a business, but don’t have an idea to build from scratch and you have the resources to make it work, a franchise can be a good choice. Next, find out what other franchise owners have to say about it. Make sure you are prepared to pay the costs associated with the franchise and that the corporate headquarters is likely to provide the support you need.
Readers: Would you create a business from scratch or buy a franchise instead?