Should I Buy a Franchise?

When most of us think about franchises, immediately Subway, McDonald’s and Quizno’s come to mind, however franchises don’t just include the food industry.  Entrepreneur magazine publishes the top 500 franchises each year and although food franchises are prevalent Entrepreneur has 75 different franchise categories.   No matter what industry franchises all have one thing in common—a systematic method to deliver services or products.

Franchising is not for everyone, but for individuals who have limited business experience or who enjoy working within an established system, franchising can be a good option.

Franchising is simply a method of distributing products or services, with at least two levels of people involved. The first level is the franchisor, who lends his trademark or trade name and a business system. The other is the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system. The contract binding the two parties is the “franchise,” but we frequently hear that term often used to mean the actual business that the franchisee operates.

Before you go into any business, franchise or not, it’s important to ask yourself some important questions:

  • Do you have strong motivation and drive to achieve success?
  • Do you have confidence and enthusiasm for the product or service you will be representing?
  • Are you able to motivate yourself and others and train employees?
  • Do you have experience in the industry?
  • Are you willing to promote your business and the brand?

Then if you decide business-ownership is for you, your next step should be to figure out if a franchise lifestyle fits into your own lifestyle. Do you have the necessary support system to open this franchise? Does your family support this decision? Do you have an accountant, banker and attorney who will assist you in your start up and growth phases?

One of the advantages to buying a franchise is the “brand” that you will become a part of.  Belonging to a system gives you (the franchisee) a competitive edge, which partially compensates for the cost of purchasing a franchise. The main value in franchising is the identity related to the brand. McDonald’s is the largest franchisor in the world with over 31,000 stores. Due to consistency of product delivery and global advertising, McDonald’s has a major advantage over, say, the diner down the street, Joe’s Diner.

It is important to remember the franchise brand is more important than anything else.  While service and the product are important, the customer’s loyalty is to the brand, NOT the individual franchisee. Consumers don’t walk into a Dunkin Donuts franchise because they know the owner. They know Dunkin Donuts. What this means is that within a franchise system, you have to play by their rules. You couldn’t open a McDonald’s and sell pizza, for example.

Your success as a franchisee is based on your willingness to work within a pre-existing system, and help to build the value inherent in the brand. This kind of a business is not for everyone, so you have to be honest with your ego on this one.

Here a few pros and cons to consider, when thinking about buying into a franchise:

Pros:

Cons:

Turnkey System – Franchises come with proven systems for operating the business and generating profits.  If your skills are weak in sales and marketing then a turnkey franchise may be best.

Less Freedom – You will be required to share financial information and conform to uniform operating procedures.  And you may not be the one to always have the final say.

Franchise Support – Buying a franchise offers the opportunity to share your challenges with other like-minded entrepreneurs…with a franchise business you’re in business for yourself, but not by yourself.

Royalty Payments – Franchisees are required to make royalty payments in return for support in operations and advertising each and every year.

 

Brand Name – Already have market awareness, won’t have to spend as much time and money marketing your brand.

Higher Start-up Costs – Start-up costs can be significant.  Make sure and find out what kind of capital is needed to launch the business and buy into the brand.

Lower Inventory Prices – Because you are part of a collective buying group this allows lower costs in purchasing inventory and equipment.

 

Easier Staff Recruiting – Franchise businesses with an already recognized name have greater recruiting pull than an unknown business entity.

 

If you need help going through the pros and cons and making a decision you can always reach out to SBA’s network of resource partners, including the Montana Women’s Business Center, the Small Business Development Centers across the state, or one of the SCORE Chapters.  You can find their contact information at www.sba.gov/mt.

So let’s say you are willing to work within that system of promoting their brand or service and you are not concerned that customer loyalty is not directed to you personally and you’ve weighed your pros and cons…Now what? What kind of business should you think about?

Go back to your personal likes and dislikes. Don’t gravitate to fast foods just because you already know how to make a sandwich.  Find an industry that you wouldn’t mind doing and thinking about 24/7. Then research all the different options within that industry.  You can search for franchises at http://www.franchiseregistry.com/.  SBA also has a list of franchises that have been pre-approved for SBA lending; you can find those at www.sba.gov/content/franchise-registry-approved-brands.

After you’ve done your initial research and have narrowed down the franchises, take your time and investigate each company thoroughly.  Talk with some top executives in the company. Track down other franchisees and ask them questions.  And you may need to consult with a franchise attorney to understand expectations on both sides and finally prepare your business plan.   Again, SBA’s network of resource partners can help you through some of these processes.

Owning your own small business can be a dream come true, and owning a franchise may be a great option, but make sure you do all of the research needed to make an informed decision.