For people who want to be a capitalist but think starting their own independent small business might be too much of a risk will give franchising a try. But is it really a safer option? That’s what we are going to find out, along with a lot of other useful information. We’re going to divide this article into 2 main segments; Pros and Cons.
We are going to go through some of the most important things you need to know before going into Franchising so that you can be fully prepared for what awaits you on your journey.
Pros:
1. A faster start to your business.
The start is always the hardest part of any aspiring businessman. A big part of your time and resources are spent on the start for writing a business plan, researching your target group, the probability of success, product quality check, etc. By opting for franchising this is not the case anymore, as everything has already been done, the business plan has been proven and is irreversible. Your job will be to continue its implementation.
2. You are known immediately.
Small startups need to devote so much time, money, and effort to get their name known to a wider audience. This is, however, not the case with franchising. You already start out under an established name, people know who you are and what you offer. There is no worry involved over whether your possible customer will recognize you or not.
This can either be done to your advantage or lead to larger risks. If a brand you are considering investing in has currently a terrible reputation it will be a significantly lower entry threshold resulting in a lower risk investment that can also make you larger gains. On the other hand, if you would invest in a franchise that is at its peak reputation, this would make the entry threshold significantly higher. The investment will cost you more funds and if soon after you’ve invested in the franchise their reputation crumbles, the consequences will be painfully clear to you.
3. The possibility of hiring higher-quality employees.
A great benefit of franchising is that the stores that open are country-wide and they seek to expand their employee pool farther away from their original location. This allows you to have access to a vast selection of possible employees, resulting in a more stable performance all around. With higher-quality employees, you can at least rest easy knowing that your business is in better hands.
4. You receive assistance with marketing from experienced professionals.
Even though people know who you are and you don’t need to invest as much in marketing as you would as a startup, you will still have to invest time and resources in marketing. The key difference is that you will have the assistance of experienced professionals helping you in your marketing campaign in the franchise. Remember, it is in their best interest that you become as competent as possible and do a good job.
5. Easier sources of investments.
While the entry threshold for franchises is high. You get the picture when the cheapest franchise options are several thousand dollars. However, while this might be a larger sum in a vacuum, you do have the advantage of access to good, low-interest business loans. The SBA loan is the most notable source of business loans for franchisees. This will allow you to, at least, not struggle with finding an appropriate loan that won’t suffocate you with its interest rate.
Cons:
1. Cracking down the myth of “Franchises Live Longer”.
Usually, there is this myth that franchises live longer than smaller startups. People take this “fact” as inspiration to get into franchising thinking that if they fuck up it won’t be as bad as it would if they had a small business. Daley talks about the myth that franchisees succeed about 90%-95% of the time, while only about 10% of startups do the same. He says that the reason that this is a common myth is from research that was done by the U.S Department of Commerce, and the results of said research said that over a span of 5 years only 5% of the franchises closed down. But this research came down to statistical manipulation due to the bias of the participants that took part in the questionnaire. Of course, the more successful franchisors will talk about their success over those that failed. Another problem is that the research was not audited. With this in mind, it becomes a lot harder to judge the actual state of success statistics of franchises vs independent businesses.
2. Limited freedom.
If you are a free spirit and want to have creative freedom to pour your innovations into your business, franchising might not be for you… Unfortunately, franchises allow for minimal divergence from the proven norm. A franchise business has its norms set, you are just another cog in the wheel. You might be the owner of the business in question, but you do not have the right to make all of the decisions, especially the larger ones. And this can be severely limiting when you want to implement an original idea. The higher-ups will have different ideas for your business and you won’t really have a say in it unless you want to go through legal problems.
3. High starting expenses.
Getting into a franchise is, as we have already mentioned, higher on average than starting an independent small business. This can make it have a significantly higher threshold of entry for a lot of potential investors. This is why you need to be fully certain if you are going to invest in a franchise because it can severely limit your available funds.
4. Royalty payments.
High starting expenses aren’t the only large expenses you will have. Owning a franchise means that you will need to pay royalties in order to operate under the franchisor’s name. This is due to them being the owners of the name, brand, and already-established business plan. And this is without taking into account marketing costs. Sure, they are lower than for startups, but they will be a financial burden non the less. With this taken into account, you have to be aware of the higher financial barrier of entry for franchising.
Those would be the most important factors that you need to consider before going into franchising. Hopefully, after reading this you have gotten a better perspective on the not-so-well-known parts of franchising. Till next time!
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