To understand the advantages and disadvantages of franchising you need to have a basis for comparison. There are other ways to realize your dreams through business ownership and you should look at those too. You could instead buy a business opportunity or create a business from the ground up. Independent business owners who have built businesses from scratch will tell you the road is long and the risks are significant — which is why so many prospective franchisees find the franchise model compelling when they begin exploring their options. There are definite advantages and disadvantages to owning a franchise business over these other options, and understanding both sides clearly is something the federal trade commission requires franchisors to support through mandatory disclosure. To know which path is right for you, you should first look at your motivations and qualifications for business ownership. Let’s consider three scenarios:
Scenario One
You have been laid off after 20 years. Even before the layoff, you realized you had reached the ceiling on your salary. Your possibilities for advancement in your career had also diminished. Your company has given you a cash settlement and you are keen to take charge of your life. You want to become your own boss and learn some new skills along the way. You want a good income and are willing to put in whatever hours necessary to jump start the new career. Your overall goal is to eventually work reasonable hours and have more time for yourself and your family.
If your history is similar, you are probably an excellent candidate for franchise ownership. Here’s why:
- This path allows you to benefit from a proven business model and a franchise system built on one of the most successful business models in modern commerce — one that has already been tested, refined, and validated across multiple franchised locations before you invest a dollar
- The franchisor’s training program and training standards will quickly get you up and running without requiring years of industry-specific experience or prior experience in the field
- As you have no previous business ownership experience, the ongoing support and business assistance you will receive from a franchisor will be vital to your success — covering everything from daily operations and marketing to managing ongoing fees and building relationships with other franchisees across the franchise network
Many franchise opportunities offer a turnkey package that will include almost everything you need to start your new business. In addition, most franchisors require no prior experience in their industry so you can be open to a variety of types of businesses and won’t need to stick to the one industry you know. Working with a franchise consultant during the discovery day process can also help you identify the franchise opportunity that best fits your background, budget, and goals before you sign a franchise agreement or pay an initial franchise fee.
What Will You Perceive as a Benefit or a Disadvantage?
There are many advantages to the franchise model that become clear once you begin comparing it seriously against independent business ownership or a joint venture. Franchisees can take advantage of lower cost materials due to group buying power — the ability to purchase goods at scale through the parent company’s supply chain is a huge advantage that solo businesses simply cannot replicate. They also learn from each other and usually form a peer support system across the franchise network that functions as an informal knowledge-sharing community. Because you won’t be occupied with every minute detail of owning a business as you begin down the path of franchising, you will be able to concentrate on growing your business and building the existing customer base that established brand recognition and recognizable brands bring to your door from day one.
One of the most cited advantages of franchising is the lower risk and lower failure rate compared to starting an independent business from scratch. Because you are operating under a successful brand with a proven business model, established brand recognition, and an experienced team behind you, the startup costs are more predictable and the path to profitability is generally clearer than it would be for a new business concept launched without that infrastructure. Potential customers already recognize the brand’s products and services, which means you are not spending the early months of your business venture building awareness from zero.
One disadvantage to franchise ownership is the element of limited control — you must follow a franchisor’s rules. You are in charge as long as you follow and adhere to all of the elements of the franchise system. This is necessary so that the franchisor can offer consistency across the brand — and let’s face it, they’ve done the research and tested the procedures so their way is usually the right way. This is also a benefit to the consumer who can expect comparable quality products or services no matter which franchisee he patronizes, anywhere across the country or around the world. The other perceived disadvantage is that a franchisee must pay royalty fees and sometimes a marketing fee to the franchisor as ongoing fees. These franchise fees and royalty fees are compensation for everything the franchisor provides, including access to the brand, the operating system and related items. The initial cost and initial investment required to enter a franchise system — including the initial franchise fee, startup costs, and any fees outlined in the franchise disclosure document — are higher than some business opportunities, and prospective franchisees should review the franchise disclosure document carefully and consult the small business administration or a franchise consultant before committing. The franchisor uses the marketing fee to provide advertising to build the brand and drive market penetration at a greater level than a franchisee could do on his own. Also, marketing funds enable franchisees to benefit from professionally produced marketing materials. They also can realize efficiencies from commingled funds.
Scenario Two
As a truly entrepreneurial individual, you are brimming with ideas for new business concepts and love to tinker with things until they are just as you want them. You are strongly attracted to the idea of being your own boss and don’t like the idea of answering to others. One of your strengths is the drive to follow through on your plans. Your background includes a variety of disciplines, including sales, marketing, accounting and management, so you are not looking for outside business assistance. Money isn’t a concern as you have plenty to spend on researching and developing your product or service. Because you intend to do significant research, a predictable time frame for break even isn’t on your radar at this point.
If you are like this type of person, one who likes blazing his own trails, franchise ownership is not for you. The potential disadvantages of limited control, ongoing fees, and the obligation to operate within a franchise agreement will feel more restrictive than liberating for someone with your profile. Instead you will be more comfortable setting up your own independent business using your own ideas and building your own brand from the ground up. This is the most risky way to become your own boss because you will not have the proven business model, nationwide brand recognition and marketing, and the ongoing support of a franchise company behind you. You may also have more difficulty obtaining business loans since lenders tend to favor franchised businesses with an established track record and lower failure rate over entirely new business concepts. The time from inception to when you start turning a profit will be hard to predict, and without an existing customer base or recognizable brand to draw from, building market presence takes considerably longer. On the plus side, you will owe no royalty fees and can operate your business just as you please. Historically this is the model least likely to succeed on average so it is recommended only for truly exceptional individuals who have the desire and stamina to start their own business based on their own unique idea or approach.
Scenario Three
A varied work history has given you some great skills which you wish to put to use running your own business. You are not concerned about the type of business you buy but want to have the freedom to operate it your way. You would be okay with a certain degree of risk but also recognize the advantages of an established system of operations. Marketing assistance and training standards, however, may be under developed or nonexistent. Although you don’t have a lot of cash to invest, your spouse works so you will have income for the time it takes your business to begin making money.
If you’re the type of person who will never stop and ask directions, a business opportunity may be the right type of business for you. This is a business you buy outright and have the freedom to run your own way without the obligations of a franchise agreement, ongoing fees, or royalty fees to a parent company. The benefit of a business opportunity is that they generally provide you with a successful business model and possibly some training and marketing assistance. The initial investment and initial cost are usually lower than for a franchise and there are no ongoing franchise fees or royalty fees. A downside to business opportunities compared to existing brands within a franchise network is that the seller isn’t invested in your success or failure. Because he makes all of his money up front, you won’t have extensive ongoing training, business assistance, or access to the experienced team and support infrastructure that both the franchisee and the parent company invest time and money into maintaining across a franchise system. There won’t be a national marketing program, research and development, or the brand recognition advantages that come from operating under recognizable brands with an existing customer base. The risk factor is probably greater than for owning a franchise but could be less than starting your own independent business from scratch.
Which Business Ownership Path Is Best?
The answer to this question is as unique as each individual. For many people, franchising has proven to be a viable and lower risk way to become a business owner. The advantages of franchising — including brand recognition, a proven business model, training standards, group buying power, a supportive franchise network, and access to the small business administration resources that favor established franchise systems — make it one of the most successful business models available to first-time business owners. For the most part it offers the lower failure rate and the highest level of ongoing business assistance compared to the alternatives. Because a franchisor doesn’t succeed until the franchisees do, you’ll find an experienced team of dedicated professionals willing to help you invest time wisely and operate effectively from day one. They’ll be with you every step of the way, from site selection and discovery day through employee hiring to grand opening and beyond as you grow to new locations. They will keep in touch with you from the very beginning to years down the road. The franchisor will have websites, toll free numbers and dedicated staff to make sure all your questions are answered quickly.
What Is the Cost of Continued Support?
The cost of this continued support is usually in the form of royalty fees and ongoing fees, and most franchisees feel the advantages of franchising are worth the expense when weighed against what independent business owners spend to replicate even a fraction of the infrastructure a franchise system provides. Research and development is possible because of feedback from both the franchisee community and those in the field, and this cooperative involvement is a hallmark of a well-run franchise business. The final benefit of franchising is that you buy a complete package backed by an established brand with proven brand recognition. You receive the brand’s products or services, brand name and trademarks, and all the advantages that come with operating under recognizable brands that potential customers already know and trust. This package includes marketing and advertising, operations manuals and proven systems built on the most successful business models in the relevant industry. Also included is typically thorough training in every aspect of the business. You can totally change careers without years of schooling or apprenticeship or research. One day you can have a job as an accountant or police officer and a few months later have a career as a successful franchise owner. Who knows what this may look like — you may end up owning a franchise business you never would have dreamed of.
Is Franchising Right for You?
If you have the initiative, patience and drive to start a business, sufficient finances and enough business experience to go it alone, franchising may not be for you. You may wish instead to purchase a business opportunity or to start your own independent business. This is especially true if you are someone who would not be willing to follow a franchisor’s system or operate within the terms of a franchise agreement. The most important component is not the business itself but what you bring to the business. So follow whichever business ownership path fits you, spend time doing the research — including reviewing the franchise disclosure document carefully with a franchise consultant if you are leaning toward franchising — and enjoy being your own boss.
