Buying A Franchise: Pros and Cons

Posted on November 4, 2009
Contributed by Peter Siegel

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:  Peter Siegel is the Founder & President of BizBen.com. He consults with business sellers, business brokers, and agents on marketing & advertising strategies when selling businesses and has written three books on how to buy & sell small businesses. If you have a question about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

Watch for more blog posts answering viewer questions in the future!