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Buying A Franchise - Pros and Cons

Contributed by Peter Siegel, MBA

The current economy may be tough for many individuals who are looking, without much luck, for work that will get some money coming in again. But for franchisors who offer an alternative to the headaches and insecurities of corporate employment, business is on the rise.

And buying into a franchise system can be a smart investment for someone who doesn’t feel secure about a future working for someone else. An auto service, fast food outlet, mailing center or other kind of franchised business can provide a solid and predictable income.

But that choice has some dangers and drawbacks that the franchisors don’t always mention when they’re signing up new franchisees and collecting substantial fees from people who want to buy a business.

For those wondering whether to leave--or have been pushed off the corporate ladder, and are considering a career as a franchisee, here are some of the primary arguments for and against that choice.

PRO

A proven system is one of the key advantages offered by franchisors. They’ll tell you, when selling a business--and it’s somewhat true--that they’ve already made the mistakes in perfecting the model, so you don’t have to. They’ve established a brand that is recognized in their market, and they’ve learned what works to promote sales.

Buying a franchise often is easier than getting an independent business for sale because a potential purchaser has plenty of people--other franchisees--who can help with the due diligence by discussing their own success and problems. Besides, there often is better financing available when setting up or acquiring a franchise, compared to the challenge of raising the funds needed to acquire a non-franchised enterprise.

Once in business, many franchisees appreciate the practical and experienced advice they get about building sales and avoiding problems from the franchisor. And they benefit from pricing and service advantages when purchasing products and supplies that they can acquire with other franchisees at group rates.

CON

But buyer candidates are advised not to get swept away by the franchisor’s assurances and enthusiasm, because franchises fail more frequently than the parent companies admit. And there are some negatives to this business strategy that the franchisor won’t reveal.

The first drawback, of course, is the need to pay a fee of several thousand dollars, maybe tens or hundreds of thousands, just for the privilege in investing in the business. That chunk of cash is required in addition to the money a buyer has to produce for build-out of a new franchise or acquisition of an existing business for sale. Then there’s working capital and marketing money that must go into the pot. Yes there may be financing through the company, but supporting that debt can take much or all of the profit of the business.

And while there is benefit to a system that is proven to work in producing and selling products and services, it also means limitations. The franchisee usually can’t expand the business by addition of say, ice cream cones at the sandwich shop, or by performing brake jobs along with transmission repairs. Violation of the franchise agreement by breaking the rules can have dire consequences, such as losing the business and all that was invested.

Also to be considered is how quickly the asset of a well-recognized brand name can become a liability. Just ask fast food franchise owners who suffered a big drop in business, not their fault, because of bad publicity when another franchisee sold contaminated french fries.

As in any business decision, the best approach to determining whether a franchise purchase is a good idea, starts with common sense and includes some research and knowledge of, or a quick education about the industry in which the company is involved.

About The Author - Peter Siegel is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 866-270-6278.

Posted on June 7, 2010 | Email This Blog Post | Print This Blog Post | All Contributions From Peter Siegel, MBA

Categories: BizBen Blog Contributor, Franchises For Sale, How To Buy A Business

Comments:

Speaking from my experience with franchises I should tell you that what you say is not always the case. It depends on the company. There are franchisors who inflate the prices of the supplies and the products that the businesses in their system are required to buy. An owner of a franchise could get a better deal elsewhere, but that would violate the franchise agreement. Another problem is franchisors who send their officers to consult with individual owners and train their employees. Some of the so-called consultants don't know what they are talking about. So it all depends. Talking to other franchisees is definitely a good idea. And do it before committing to buying a franchise.

Posted by: Tom Guttierez

I do know of a case where a tire company had product problems and once that became public, it hurt the franchisees. The biggest issue was that customers were coming in to get their tires checked because of what they had heard or read. The franchisees didn't have time to get to paying customers. But there is the other side. If you sell gasoline for a franchisor and you have trouble with product seeping underground it has to be fixed. And it's very expensive to do that. But the franchisor usually is required to pay that bill.

Posted by: David H.

What I heard is that franchisors are more motivated right now to help people buying into their systems. The revenues might be down because there is less business that the franchisees are doing. And the franchisor gets paid a certain percentage from each franchisee. So, the franchisors want to add more businesses in their system. They can do that by selling more franchises and if they want to sell more franchises, they may have to help finance the deal. Franchisors are willing to do that more right now.

Posted by: Lawrence Ing

I think it's true that franchises have a better chance of success than independent small businesses. It stands to reason. But does anyone know what the real difference is in a way that is quantified? A lot of the studies, or so-called studies and statistics are conducted by the franchise industry and the franchisors are the ones who keep publicizing the fact that if you are in a non-franchised business, you run a bigger risk. They don't always make it public when one of their franchisees goes under. And why would they? They don't have to. They buy back the assets or just take them over and resell the franchise. And as far as anyone is concerned, that particular franchise (such as in a certain territory) is still in business. Well, technically, okay. But it hides the fact that the last franchisee there couldn't make it.

Posted by: Louis Tek

Like any business, there are risks to any franchise system, however, there is no doubt in all the literature that Franchises reduce that risk because of the system and because most of the time the Franchisor is protective of his franchises and dependent on their success. Are there rotten apples? yes, but they are very few of them Do not make the mistake of assuming you need not work hard because it is a franchise; you must always work hard to make a success out of it, then duplicate your success by opening another and so on. Nearly 50% of retail businesses in the US are franchised businesses. Any day now Subway will become the Franchise leader in the world with more stores than McDonalds-an amazing story ! Fayaz Karim, Extreme Pita and Subway specialist

Posted by: Fayaz Karim

You did mention some good reasons for and against buying a franchise business. But there are other ones also. A positive is the advertising the company does that can help all of its franchisees. One individual can't afford all of the advertising that the franchisor can do. For bigger companies it even can include television commercials all over the country. But that also could be a problem. In some neighborhoods they don't like big companies too much. So if you have a franchise in an area like that you want to emphasize that you serve the local community and are locally owned, but you don't want to promote the fact that you belong to a national chain. (You aren't trying to hide it, you just don't want to promote that fact).

Posted by: Steve C.