One of the first decisions you’ll make as an entrepreneur is whether to start your business independently or as a franchise owner. Weighing the pros and cons of franchising will help you decide which path is right for you.
There are nearly 774,000 franchise establishments across the U.S. employing more than 8.4 million people. Clearly, the franchise model has much to offer entrepreneurs looking to start a new venture.
But life as a franchise owner may not always be as rosy as it seems. In this guide, we weigh the pros and cons of franchising to help you decide if franchise ownership is right for you.
Advantages of Franchising
The franchise model reduces some of the risks associated with starting a new business. It also gives you access to certain perks that an independent venture doesn't offer. Here are some of the pros of franchising.
It lowers your risk...
One of the biggest draws to franchising is the fact that it lowers your risk as an entrepreneur. There are many uncertainties you’ll encounter when deciding if you should start your own business, and the franchise system helps with some of these unknowns.
Launching a business brings up numerous questions. Will you find customers who are willing to spend their hard-earned dollars at your business? How long will it take to make a profit? Ultimately, will you be able to succeed?
Franchise companies have a team of industry experts who can help answer some of these critical questions. These industry experts know what it takes to make your business profitable since they have successfully launched multiple locations of the same business concept
When you open a franchise, you can expect to receive assistance related to location scouting, your grand opening, and training for you and your employees. The best franchisors will offer services to get your venture off the ground as well as ongoing support to ensure continued growth for your business.
Your business leverages brand recognition...
Franchises have established brand recognition that franchisees inherit. One of the uncertainties of starting your own business is that consumers won’t know anything about your brand. You need to build your brand from the ground up when launching a new business.
This isn’t the case for the franchise model. There’s a good chance your customers will already be familiar with your franchisor’s brand and will understand the quality of your products or services. This will enable you to secure a customer base and ramp up sales more quickly than if you were to start from scratch.
Customers have a higher propensity to trust brands that are already familiar. Nearly 60% of customers will buy new products from a brand they know over a brand they haven't heard of before.
You get access to a well proven business model...
Brand recognition isn’t the only advantage you inherit as a franchisee. You also have the luxury of adopting a business model that has proven to be successful.
There’s a reason why companies turn to the franchise model. Franchises have repeatable business plans you can use when expanding to new locations. If it works at one location, it can likely work at another.
That’s where you come in. You can take their proven business plan, build your business with their model, and turn a profit.
You will have purchasing power from the starting gate.
There are cost advantages to using the franchise business model that you wouldn’t receive as an individual business owner — at least in the beginning.
Franchises have supplier partnerships in place that allow you to purchase inventory at a reduced price. These relationships have been developed over time and could be difficult to establish quickly on your own.
The franchisor can also purchase a large number of supplies at a discounted price that are then distributed to individual franchise locations. This collective buying power means you get materials at a lower cost per unit. And more savings for you translates to higher profitability.
Readily accessible financing.
A majority of entrepreneurs need additional funding to launch their business. Franchisees have greater access to financing compared to independent business owners.
Franchises are a safer bet from an investment standpoint. Investors are more likely to invest in franchise business models rather than businesses that are independently owned. This is because the business model has already been proven at previous locations.
Not only can a franchisee seek business loans from a third-party, but they can also turn to their franchisor for additional funding. This type of financing typically comes with favorable terms and interest rates. It can also be easier to obtain compared to using a third-party investor.
Disadvantages of Franchising
When reviewing the pros and cons of franchising, it’s clear that there are a number of advantages. But there are several drawbacks to the franchise business model. Here’s what you need to know.
High startup costs...
Starting your own franchise can be more expensive than you might think. Many franchises have high startup costs that can prevent many entrepreneurs from entering the space.
First, consider the initial investment that’s required to start a franchise. Some franchises have lower initial investments that can be under $15,000. But many franchise opportunities have initial investments that exceed $100,000 and even surpass the million-dollar mark.
To start a franchise, you also need to have a certain amount of liquid cash on hand. Franchisors want business owners who can put money down to get their business started. You also need enough cash to support the growth of your company and cover any associated costs with your new venture.
There are also ongoing franchise fees that you’ll need to pay. This includes flat-rate monthly fees and variable royalty fees that increase as you do more business.
Significant creative and business limitations...
If you want to start your own business, be your own boss, and answer to no one, then the franchise model may not be the right fit for you.
While you’re able to be your own boss to a certain extent, you’ll always be answering to someone higher up at the franchisor level. This especially applies to the creative control you have (or don’t have) over the brand and the limitations to your decision-making.
For example, if you decide you want to be part of a fast-casual restaurant chain, you will need to abide by the rules set by your franchisor. Let’s say you want to add new items to your menu. You will likely be met with restrictions since the menu is set by the franchisor.
You may have some flexibility when it comes to decisions like these, but for the most part, you’ll need to abide by the rules you’re given.
You’re at the mercy of the brand.
As an entrepreneur, you likely want full control of your brand. With a franchise, you must follow the brand’s guidelines.
Remember, your franchise location is inseparable from the overall brand. If the franchise brand is going through a PR crisis, chances are it’ll have a detrimental impact on your business.
For instance, let’s say you own one location of a restaurant franchise. Then, a news story breaks about e. coli contamination at another location from your restaurant group.
This type of negative experience can have a direct impact on your business even though it has nothing to do with your location. Consumers might then associate this problem with your business. As a result, you could end up with reduced sales and a tarnished public perception about the brand.
In any business, you’ll need to meet certain financial goals if you want to survive. With a franchise, you’ll have contractual obligations and financial goals to stay in business.
Franchisors will set sales levels within your franchise agreement that you’ll need to meet to maintain your good standing with the company. If you’re unable to meet these sales levels, you run the risk of your franchisor deciding to not renew your franchise contract when the time comes.
Weighing the Pros and Cons of Franchising
Pursuing the franchise model will open doors to resources you may not have access to on your own. It can limit your risks by giving you a business playbook that has been proven to work for other business owners.
But a franchise also comes with drawbacks you shouldn't ignore. Franchising can be a costly endeavor and can limit the control you have over your small business.
Fortunately, there are other options that can give you a support system and team of experts to help you succeed. It’s possible to build a successful business without using the franchise model — and without having to figure out everything on your own.
Take a look at how Main Street can help you scale your new venture and shorten the path to profitability