Pros and Cons of Buying a Franchise Business

Tap to Read ➤ Urvashi Pokharna

A franchise business is a convenient business model employed by people looking for some guaranteed return on investments. Have you lately become interested in opening up a franchise business for a brand name? Go through the merits and demerits of buying a franchise to make an informed decision.

Franchise businesses have become popular around the world and have helped businesses reach people though their street corners. Some of examples of successfully running franchise businesses that can be seen today are Starbucks, McDonald's, Subway, Super 8 and 7-Eleven. USA is abundant with 2500 companies offering lucrative franchise business opportunities.

Are you unhappy with your job or have been laid off due to your company's inability to recover post-recession? You may have considered operating your own business under a well established brand name and must be excited at the prospect of it.

Franchise businesses span over 75 industries and alone employ more than 8 million people in the States. Did you know? Every 8 minutes, a new franchise business opens up in America.

Advantages of Buying a Franchise

Brand Recognition

Franchise businesses are very popular and well-known among people due to their national/international presence. Hence, they have already created a brand image for themselves that you have the opportunity to enjoy by opening up a franchise for them. You will already have a customer base from the surrounding area of the location of your franchise business because consumers are already familiar with the brand name.

Lower Marketing Costs

Due to the above mentioned benefit, marketing costs will be low as the franchiser will already be heavily investing in marketing operations to promote the brand image and capture a larger market share.

Tested Business Model

A franchise business eliminates the uncertainty of the success of the business. You need not worry about the response of prospective customers to your business because it has been set up on a per-established business model tested and proven for its success. You can very well focus your attention to managing your business.

Personnel Training

All franchisers provide training programs to train your employees to handle sophisticated machines and equipment. They also teach them special trade skills and techniques for the business. You will save up a great deal on employee training costs as they are borne by the company.

Technical Support

Franchisers help set up the right technological environment for the business by providing easy access to purchase of tools and machinery. They also provide inventories at low costs by exploiting their bargaining power and business relations with suppliers.

No Investment on R&D

The franchiser takes care of research and development for the business too. They provide training and equipment to imbibe new innovations and inventions in the business. You do not have to direct your finances to R&D, as observed in other businesses, to flourish. **Some franchisers may provide loans for opening up the business. However, do remember that it creates a business liability.

Disadvantages of Buying a Franchise

Capital Investments

Franchisers have high demands for initial capital investment to set up the business and provide a guarantee. Hence, it may not be feasible for someone with a poor financial backing. Be prepared for a minimum investment of at least $250,000 as start up costs. Your property rentals add up on it.

Time Restraints

To buy a franchise, you must enter into a contract with the franchiser that legally binds you to run the business for an average period of 10 years. This may prevent you from opening up your own business for that span of time.

No Flexibility

If you're an entrepreneur looking forward to employing creative business innovations, franchise business may not be the thing for you. This is because all franchisers lay down a strict code of norms and guidelines for management of the business to promote standardization. They do not encourage any creativity that modifies the business environment of your franchise alone.

Royalty

A big brand name comes with a price. To exploit the company's well established name and seek the benefit of its technical and marketing support, you must compulsorily pay them an annual royalty payment. It may be as high as 3 to 6% of your gross sales, biting off a large chunk of your net profits.

Absolute Transparency

You must provide a 100% access to your franchiser to the financial statements of your business. You are fully accountable and answerable for every business move to them. If you have to make a business decision, you must first seek the approval of the franchiser before you act on it.

**Some franchisers may also ask you to pay for the benefit of marketing and advertising costs. In such a circumstance, payments are extremely unavoidable.

A franchise greatly reduces the risk associated with operating a business. However, it is advisable that before you plan to buy a franchise business, evaluate its pros and cons, conduct your own market study and assess the compatibility of the business with the location available to open the franchise.

Do not be fooled by sugar-coated franchise offers that make false promises. To know the real deal of their support to their franchise businesses, ask other franchisees that are already running in town. It is also imperative to have a good knowledge and aptitude to know how to choose the right franchise business.

A franchise business can be useful for someone who lacks the right marketing and sales skills but wants to open up a business. Also, it has been proven that franchises have a higher probability of success as compared to individual businesses.