In today’s article I am going to begin our series of articles on types of businesses, with a look at the pro’s and con’s of buying a Franchise. Once we cover the ins and outs of buying a franchise, we’ll show you how to finance the purchase of a franchise.
I would not make a good franchise owner. You may be like me or you might be a good candidate to own a franchise. Below are the reasons why I would not make a great franchise owner and potentially why you might. Additionally, there is a big lie that is told about opening a franchise. We debunk this lie and explain why franchises have the same success rate as independent start-ups.
Did you know? If you have more than $50,000 in your retirement account you can use this money to start or buy a business (franchise or non-franchise) without paying early withdrawal penalties and taxes. It’s called a ROBS. Click here to learn more or speak with a experienced team member of Guidant.
Do you like following proven systems or finding your own solution?
I started my own business because I have tremendous faith in my ability that I can “do better” or “make improvements” on existing business concepts. Essentially, I am very creative and ingenuitive person and like to apply my ideas to my business .
On the other hand, if you don’t like experimenting and wasting time to find a good solution, then buying a franchise might be the right path for you. Franchisors have established ways of operating that have been developed over time. You don’t have to search for answers, they already have them. In many cases, they mandate that you follow their processes.
Are you willing to commit to a business for 5, 10 or 15 years after buying a franchise?
Most good franchises have fairly large start-up costs, from $100,000 to $1 million dollars. Once you invest that type of money, its very hard to walk away from the investment. While you can always try to sell a franchise, that process may take a long time and you might have to take a big loss if the business is not doing well. Are you prepared to spend the next 5 to 10 years of your life operating the franchise.
Half of all franchises are in the food services industry (50%). While the franchise owner is sometimes behind a desk, a large portion of their day is with their team in the kitchen, interacting with customers, and on their feet. I don’t want to spend the next 5 or 10 years of my life walking around my franchise.
On the other hand, you might hate sitting behind a desk and really enjoy constantly interacting with employees and customers. Remember, you may be doing this for the next decade.
Do you need your business to produce immediate revenue?
I don’t know anyone that doesn’t want immediate revenue. However, most business ideas with large potential for growth require an upfront investment and the ability to go without a “salary” for at least couple years. Going with a well established franchisor (like Subway) has the potential to provide a “salary” much more quickly than a start-up business. However, there is much less upside.
Why You Might Want To Look Into Buying A Franchise
Buying a franchise has three main benefits:
- The ability to open your business quickly or execute a smooth transition from the existing owner to you.
- Customers coming to you because of the national brand.
- A relatively predictable business model which can make planning and financing the business easier.
Benefit 1: The Ability To Quickly Launch Or Seamlessly Transition Ownership
When launching a new franchise, the Franchisor takes much of the research, planning and relationship development off the shoulders of the business owner. Let’s take a franchise like Subway. The parent organization does the following and much more:
- Product Development (what food will the franchise serve)
- Store Design & Layout Guidelines (the inside and outside appearance of the store)
- Product Sourcing (which suppliers one should use)
This work can save a person/team launching a restaurant anywhere from months to over a year in time to get the doors open.
If you’re buying an existing franchise, you don’t need to heavily worry about the knowledge necessary to operate the business leaving with the owner. In addition, the process focused way in which most franchises operate, there is tremendous institutional knowledge available and provided by the franchisor. Most franchisors offer training to new owners, detailed procedure manuals, 800 help numbers, and have support teams that visit franchises.
Benefit 2: The National Brand Providing a Halo Effect for Franchises
When I see a Subway franchise, I know a lot about the store before ever stepping into it. Basically, I know that I can in a short period of time, for a relatively small amount of money get a sandwich, soft drink, and chips. Also, I know that the Subway franchise will be both clean and well lit. My knowledge of Subways comes from eating at Subways, as well as seeing their ads on TV and hearing them on radio. In short, I am familiar with the Subway brand. In the case of Subway, individual franchises benefit from the parent brand.
Benefit 3: A Predictable Business Model
There are over 28,000 Subway franchises in the United States. This means there is lots of information about the average performance of Subway franchises. This information is publicly available via the Franchise Disclosure Document (FDD). While your franchise might not be average, its a great starting point which can provide the basis for reasonable assumptions about how your Subway’s franchise will perform. With most new business ideas, the assumptions are more guesswork than data driven. The advantage of a franchise is there exists high quality data to use in creating a business plan and assessing the value proposition of the business. This data is also useful to bankers and make the chance of getting loans to partially finance your purchase of a franchise more likely.
Research Franchise Opportunities By Cost, Location and Industry: Here
Don’t Buy a Franchise because You Think it’s Safer – it’s Not
A commonly quoted statistic is that franchises have a 90% success rate. That number is completely bogus. There is a grain of truth in every statistic. This number actually refers to a study of the renewal rate by franchises with a franchisor when their contract expires. Generally speaking, a franchise gets a 20 year contract. Ninety percent of the franchises that survive to the end of their contact chose to continue being a franchise.
Survival among independent businesses and franchises appears to be similar. . . About half of all new establishments survive five years or more and about one-third survives 10 years or more.
– Brian Headd, Small Business Administration, September 2012
I would like to give a huge hat-tip to here to a site called BLUE MAUMAU which covers the franchise industry with honesty and integrity. Here are some articles that they have written on the topic above:
- Government Warns Again: Franchises Do Not Succeed More Than Small Business
- Franchises Have Higher SBA Loan Failures
Why would a franchise have the same success rate as other start-ups?
- Higher Start-up Costs – Most new business owners have a limited supply of capital. The huge upfront investment required to open some franchises may deplete the owner’s capital more quickly giving the owner less runway to make the business successful.
- Proliferation Of Cheap Franchises – One major website ranks 500 different franchise opportunities. I have never heard of many of these franchises and doubt their brands have much recognition outside of where they have been operating locations for a while. The brand being offered by these companies don’t offer the franchisee any competitive advantage.
- Lack Of the Ability To Pivot or Adapt – When a business is suffering or not working, most companies either cut expenses or try something new. Franchisor rules may limit the ability of a franchise to cut costs (ie, there may be rules about the minimum number of employees) or something new.
More great resources on Franchising:
- The AAFD Roadmap To Selecting A Franchise: Most information about buying and selecting a franchise is highly tilted towards being pro-franchise. The AAFD provides one of the most balanced perspective.
- IFA University: Great introduction to franchising. Click on “Free Course” located on the left hand side of the screen.
- Franchise King Blog: Joel Libava is one of the most prolific writers on franchising. Be sure to sign up for his free e-book.
Did you know? If you have more than $50,000 in your retirement account you can use this money to start or buy a franchise. Plus, with a rollover for business startups (ROBS) you won’t have to pay early withdrawal penalties and taxes. Click here to learn more or speak with a experienced team member of Guidant.