Buying a Franchise? Go or No Go?
At our firm, we have recently worked with two clients who invested in early-stage franchises and encountered serious challenges: there was little support from the franchisor, the product mix was limited, and the brand was not yet established with customers. In each case, our clients found themselves paying franchise fees and royalties for many of the benefits an established brand would provide, without actually receiving them. It is worth noting that not all franchises are created equal. Long-established franchises like McDonald’s, Subway, and 7-Eleven have spent decades refining their systems, building brand recognition, and developing robust support networks for their franchisees, whereas early-stage franchises can be a far riskier proposition.
The good: The classic franchise advantages
Buying a franchise is often touted as an easy way to launch a business quickly. The advantages of a franchise are that there is less experience required to own and operate a franchise, tried and tested product lines, and an established customer base that is familiar with an already established brand and support from the franchisor. While, on paper, this makes buying into an existing franchise appear to be an easy path to business ownership, there are some serious downsides that we believe make this a worse option than creating a new business.
Buying a franchise is often touted as an easy way to launch a business quickly. The advantages of a franchise are that there is less experience required to own and operate a franchise, tried and tested product lines, and an established customer base that is familiar with an already established brand and support from the franchisor. While, on paper, this makes buying into an existing franchise appear to be an easy path to business ownership, there are some serious downsides that we believe make this a worse option than creating a new business.
The bad: The cost of doing business
Before a franchise owner even encounters the potential pitfalls of franchise ownership, there are the relatively high startup costs associated with buying in. A typical franchise fee, which allows you the rights to the franchise name and model, can cost anywhere from $20,000-$50,000. This does not include additional startup costs that most business owners have such as inventory, hiring, legal fees, and more. Legal fees in particular could be higher as a simple formation is a straightforward process in most cases, whereas the fees associated with reviewing the legal documents in a franchise agreement may be more unpredictable.
Beyond the franchise-specific startup costs, there are also franchise-specific operating costs. Almost all franchises will have a built-in franchise royalty fee, which is typically represented as a percentage of gross sales. This eats in to overall profitability, and reduces
the potential working capital that could be used for other things. Additionally, many franchises require their owners to dedicate a set portion of their budget towards marketing and advertising. This further reduces the overall profits of the business, and the franchisee often has no ability to reduce the amount required.
The ugly: a lack of freedom
The biggest reason that we discourage our clients from buying into a franchise is the lack of freedom over business decisions that a franchisee has. Ultimately, a franchise owner is answerable to the company that owns the franchise itself. This has the very real possibility of creating friction between franchisee and franchiser. If you dislike a certain product or business direction that the franchiser has decided on, there is practically no means of deviating from their desires.
Looking at this from a big picture perspective, the business is never fully yours. While you do have the ability to make some operating decisions regarding your respective location, a franchise owner is not completely in control. Some franchisers can be very restrictive in what they allow, and this can create a very suffocating environment. The relationship between franchisee and franchiser is complex, and could be its own article, but the essence of it is that a franchise is not always a path that allows you to truly build a company according to your vision and desires.
Bottom Line
Franchises can offer real advantages to those looking to become entrepreneurs, and well-established brands with proven systems and strong franchisor support can be a sound path to business ownership. Our caution is aimed at early-stage franchises, where, as our clients experienced, you may pay franchise fees and royalties for the benefits of an established brand without actually receiving them. Too often, someone buys into an unproven franchise only to find that the idea of easy business ownership they were sold by the franchiser doesn’t quite match reality. If you are considering a franchise, do your due diligence on the franchisor’s track record, support, and systems - and remember that building a business from the ground up, while it has its share of difficulties, can in the long run be a better way to bring your entrepreneurial vision to life.
Are you interested in starting a business? You can contact us at 915.815.8482 or email sseck@seckassociates.com.