Pros and cons of franchises
There are advantages and disadvantages to buying a franchise vs. launching an independent business. The advantages include:
- Franchisees benefit from brand recognition. Subway franchisees can secure new customers quickly because people already know Subway. An unknown sandwich shop with a similar offering has to overcome the hurdle of educating would-be customers about its brand and menu.
- Branding decisions have already been made. Franchisees don't have to design a logo, write a tagline, or choose brand colors. They probably don't have to create employee uniforms or plan the layout of their business location, either. With those decisions already made, the franchise launch is relatively streamlined.
- Franchisees may have access to lower-priced materials. Franchisors often negotiate with suppliers using the scale of their franchisee network to secure better pricing.
- Franchisees can follow a proven business model. Franchisors should provide various resources that document success factors and business practices. These might include handbooks, presentations, on-site training, and meet-ups with other franchisees.
Disadvantages of franchises relative to independent business launches are:
- Franchisees and franchisors can have conflicting objectives. The franchisor's objectives revolve around the health of the franchise network and the brand, which may conflict with what an individual franchisee needs.
- Start-up and ongoing costs can be high. The most popular franchises require steep upfront and ongoing fees.
- Franchisees don't have full authority to make business decisions. Franchisees must follow the business and brand plan outlined by the franchisor. There is limited opportunity to make product or branding decisions.
- Benefits can range dramatically from business to business. Some franchise businesses have no brand recognition and minimal defined processes. There are business-to-business franchises in the marketing field, for example, that only provide access to tools and services the franchisee must resell.
Questions to ask
Franchisors can vary in quality, and business models can deliver varying results across different markets. Therefore, careful research is required to identify franchise opportunities suitable to your situation. Unfortunately, it's not enough to review the franchisor-provided materials. These are likely crafted as sales pieces to encourage an investment in the business.
Topics of focus in your franchise research should include:
- Franchisee statistics. On average, how long does it take new franchisees to achieve profitability? What is the breakeven timeline? What is the failure rate?
- Franchisor support. What level of business support does the franchisor provide?
- Cost structure. What are the start-up costs and ongoing licensing fees?
- Success factors. What skills and experience did the most successful franchisees bring to the business?
- Demographics. What are the customer demographics, and how do they compare to my local population?
- Franchisee outlook. Are existing franchisees optimistic about their businesses and growth opportunities?
- Work/life balance. What does a franchisee's day look like? How much do franchisees generally work?
Ideally, you'd pose these questions to a franchisor representative and to several existing franchisees. That way, you can compare the tone and content of their responses for a more complete picture of the opportunity.
