Franchising is becoming a popular way to start a small business. But is running a franchise a good idea? Let’s look at the benefits of running a franchise over starting your own new business. We’ll also address some of the issues franchise owners run into that could cause them to become part of the 50% of start-ups that fail within four years.
Franchise businesses require paying an initial franchise fee. Depending on the business model and the contract you sign, you may owe a hefty franchise fee even if the business doesn’t generate much income.
Another issue is the cost-benefit ratio. There are low cost franchises you can run out of your home. Yet you may be able to start the same type of business on your own.
Is the name recognition worth the cost of the franchise fee? Will having that famous brand bring in enough new customers on its own to save on marketing costs? And will the higher traffic ensure you can pay your bills and the ongoing royalty fees? If you don’t understand the contract, have a solicitor review it so that you don’t make a financial commitment you can’t meet.
A side benefit of being in a franchise is that your operating costs may be lower simply for being a member. When the franchise buys stock or equipment, it can leverage economies of scale that may result in discounts with key suppliers.
When you’re buying into a franchise, you’re buying a proven business model. This reduces the risk of failure. Others know it too.
If you’re starting a brand-new business, the odds are greater that banks will loan money to you if it is a well-known franchise than if it is something you’re starting from scratch. This is due to the fact that about 60% of new small businesses fail within five years while the rate is closer to 5% for franchises.
Another great benefit of working under a recognised brand is that recruiting becomes much easier. Finding quality employees is something many small businesses struggle with. A big national or international franchise will have a much greater pull than any unknown business entity when it comes to recruitment, so that’s a major plus.
However, the restrictions the brand places on its franchisors can be a burden. The brand sets these rules to make the brand recognisable and consistent. So, if you want to exercise creativity in the business, you may be constrained by your contract.
The franchisor might also impose certain promotions that you don’t see as beneficial, but you’ll have no choice but to honour them even if you’re operating at a loss, so be aware of that. And you’ll also be obligated to share financial information as well.
Many franchises offer training to their new owners and provide support throughout the process. This can reduce the risk of failure, especially if you don’t have any experience or expertise in the industry. You’re less likely to make a critical mistake when you have training by experts and others available whenever you have questions.
However, not all franchises offer the same level of support and some are notorious for not being supportive at all to their franchisees. In some cases, franchisors won’t be able to offer field or market support for instance. Some owners may also expect too much from the franchisor and expect the head office to fix all their issues.
At the end of the day, the only person you can count is you, so try to network with other franchisees and see how much support they’re getting before you choose a particular franchise.
The Immediate Set-Up Option
If you open a brand-new location, the franchise will still get you up and running as quickly as possible. In general, the franchise business will help you find an appropriate location.
If the business relies on foot traffic or visibility from the street, they’ll help you find a retail space that is right for you. If visibility doesn’t matter to the business’ success, then they’ll provide advice on cost-efficient locations. Note that you still want commercial property legal advice from a law firm like Harper James Solicitors before you sign that lease.
Marketing is already simplified by working with a franchise. Where franchises really stand out is in the marketing of new businesses. Most franchisors publicise the launch of the new franchise to generate traffic, and they will generally be able to afford the big ad campaign that the average small business can’t.
Also, since the brand is already largely recognised, customer acquisition costs are way lower and you’ll be able to attract customers way faster than with an independent business.
Before you sign up with a franchise, do your research. While there’s less risk and more support, you sacrifice creativity and a portion of your profits.