The Downside to Franchising

There are several great reasons why you should consider becoming the proud owner of a franchise location. On the other hand, there are a few downsides to franchises that you should consider before you sign a contract.

Why Franchises aren't a Good Idea

You’re Not a Completely Independent Business Owner

One of the reasons so many people find franchises appealing is that they provide individuals with an opportunity of owning a business, while simultaneously providing a great deal more security than one has when starting a business from scratch.

However, when you purchase a franchise location, you don’t have the complete independence you’d enjoy as the owner of a start-up business. The franchise has a strict set of guidelines, that includes when you must renovate the location, pricing, training, and other issues you must adhere to. If you don’t like being told what to do, you might want to reconsider you plan to become involved in the franchise.

Getting Started is Expensive

While most franchise owners enjoy a decent return on their investment, they also admit that the initial investment was steep. Not only will you have to pay franchise fees, which can be as much as $75,000, you’ll also have additional expenses that include:

  • Scouting, surveying, and purchasing property
  • Constructing the new location
  • Purchasing building permits
  • Furnishing the location
  • Initial inventory
  • Employee training costs
  • Initial employee payroll
  • Insurance

The good news is that you can reduce the initial cost of investing in a franchise by sticking to home-based and mobile franchises.

Promotional Deals Can be Tricky

One of the great things about franchises is that you get to take advantage of the marketing campaign the master franchiser put together. The downside to this is that you’re required to honor any promotions the franchise has put together. There have been times when these promotions hurt a franchise location because the promotion price was set so low, the location was no longer able to meet it’s operating expenses. This particular issue is most commonly seen in fast food franchises.

Hands-on Owners Make the Most Money

If you plan on investing in a franchise and then sitting at home and waiting for the money to start rolling in, you may want to reconsider. While there are some franchises owners who have managed to take a hands-off approach to running their location, the most successful franchise owners are the ones who routinely show up at the location and make sure everything’s running smoothly. The more involved you are in the daily running of the franchise, the quicker you’ll notice problems and be able to take steps to rectify them before they become a major issue.

If you don’t mind hard work and like managing, a franchise is a good choice for you, but if you don’t want to take an active role in your investment, you should stick to the stock market.

Franchising Fees Become a Part of Your Life

It would be lovely if you paid an initial franchise fee and then never had to worry about franchising fees again, but that’s not how things work. While the annual franchise fees vary, in most cases they come to 3-8%. Most franchises also charge regular advertising royalty fees which normally match the regular fees, meaning that at the end of the year, you’re paying the franchise organization as much as 16% of your profits. In some cases, the regular franchising fees are taken from the gross revenue, which means they’re even higher.

Renewing the Franchise Agreement can be Sticky

When you’re considering investing in a franchise, take a hard look at the renewal agreement. You want to make sure that you’re working with a franchise that is easily renewed once the initial contract expires. If you’re dealing with a franchise that makes renewing difficult, you could end up with a building and nothing to put in it.

If you do end up dealing with a franchise that doesn’t offer automatic renewing, it’s important to make sure your location is performing extremely well so the franchise doesn’t feel compelled to say no to renewing the agreement.

Negative Community Feedback

Small towns often develop a negative attitude towards franchises. The residents worry that bringing in the franchise, which can typically sell food/services/products at a lower rate, will kill locally owned businesses. As a result, the community may avoid going to your location. They may also start saying negative things about you.

The best way to turn a negative community attitude around is making sure you’re an active member of the community and that you do good things in the name of your franchise. This can include things like sponsoring a youth activity, offering special deals to local service professionals, or providing sweet community-wide promotions.

Finding out the Franchise’s History isn’t Always Easy

You want to know that you’re aligning yourself with a profitable franchise.

While there are laws in place that require franchises to reveal some important financial and operating information, people who’ve become involved with various franchises report that it’s not much information and that most franchise organizations like to reveal as little info as possible, especially when it comes to how much money you can expect to make.

It’s in your best interest to not only insist that franchise provide you reports that outline things like:

  • Overall success rate of locations
  • Average Unit Growth
  • Average Sales Per Unit

It’s also in your best interest to talk to others who already own franchise locations, especially ones that have locations that are similar to the community your plan to operate out of. Not only will they provide you with a good idea of what your profit margins will be and about how long it takes to get a full return on your investment, but you’ll also get a good impression about how easy the franchise organization is to work with.

Taking the time to think about the negatives as well as the benefits connected to becoming a franchise owner goes a long way to deciding if the business opportunity is right for you.