A 2012 survey found that just 19 percent of workers – less than one in five – are happy with their careers. Another study said a majority of us would like to work for ourselves – but as most of us understand, self-employment can be a risky move. Would a franchise be the first step to freedom and wealth? Let’s look at the pros and cons of starting a franchise business to shed some light on the decision.
Starting a business from scratch usually requires a long ramp-up period, which can not only drain your financial resources, but it can also lead to financial ruin. In fact, a failed business venture is one of the leading causes of bankruptcy.
Franchises in general prove to be winners. The public knows franchises and you can hit the ground running with a brand customers already trust. That means instant cash flow and often immediate profits.
Other undeniable advantages:
Creating and implementing a successful marketing plan is the single most crucial aspect of running any business. In order to get customers, you first have to reach out to them through marketing. With a franchise, marketing is handled for you, often by national advertising campaigns that institutionalize the company. Name recognition comes the moment the sign goes up on your business.
Most franchises have well-established management plans, similar to a company handbook. You mostly have to follow the plan. And since it’s worked at hundreds of outlets around the country, it will work for you also. They’ll provide you with hours upon hours of training, as well as continuing education. Periodic coaching is often available as new business practices develop.
Owning Multiple Franchises
Did you ever see the movie The Blind Side? When Michael asks what the dad does to make money, the young son, SJ, replies “We own like a million Taco Bell’s.” OK, that was an exaggeration, but the Tuohey family is real, and they do own enough franchise outlets (85 to be exact) to live a very comfortable lifestyle. Once you own and operate one outlet, you can scale up by adding additional ones as finances permit.
Cashing Out to Retire
Much like owning a bricks-and-mortar business of your own, if you decide you want to cash out and retire, you can sell your franchise operation to another buyer, often for more than you paid for it.
Many years ago I attended a restaurant seminar in which the speaker said “Locate your restaurant wherever McDonald’s does.” Franchise locations are seldom arbitrary! They have a system to determine if a location will work or not. That stacks the deck in your favor.
While all that topside control offers so many obvious advantages, it also creates a few limitations, and some of them are serious.
Though there’s usually more than one way to solve problems, sell products, or attract new customers, you may not be able to exercise your God-given talent and creativity. A big part of franchising is uniformity within the brand. You have to build according to restrictions, sell what they tell you to, and employees must wear what “corporate” tells them, among so many other restrictions.
You may be asked to accept certain hours of operation, advertisements, and more. For example, you can’t buy a KFC and decide you want the color scheme to be blue and orange. It might be “their way or the highway.” When you agree to become a franchisee you to sign away many of your legal rights. There isn’t much you can do if you feel you’ve been wronged.
The location of the franchise (a benefit listed above) may be completely out of your hands. You may wish to locate the business close to your home, or at what you are sure is a can’t-miss spot, but the company may feel otherwise.
You may also be required to partially fund advertising at both the national and local level. Franchising offers many benefits, but you will have to pay for each and every one of them.
And speaking of paying, franchises aren’t cheap to enter. Depending on the size and success of a franchise, you may have to provide an upfront investment of anywhere from a few thousand dollars to several hundred thousand dollars. That could be your entire life savings.
Fortunately, franchises often provide financing for the balance. If the total investment is, say, $500,000, they may require you to front 30% – $150,000 – and they’ll hold a note for the balance. Just as you would need to do to start any capital intensive business, you will most likely need to carry a large debt – in addition to your upfront investment – just to get the doors open.
Financial and Personal Considerations
Despite the great monetary benefits to starting a franchise business, you have to seriously consider if you fit the franchise mold on a personal level.
Since a franchise involves selling what is essentially a pre-packaged product line, you have to make sure that it is one that works for you personally. For example, if you’re a big consumer and proponent of healthy eating, you may be at odds with the whole idea of running a burgers-and-fries operation.
If you’re fiercely independent, you may crash and burn in the franchise management model. You won’t be a free agent – you’ll be more like a corporate manager with an equity stake. That’s hardly a role for a rugged individualist.
How do you feel about your time? Most franchise operations require that you work the equivalent of two full time jobs (70 to 80 hours per week). If you like your free time, or like having control of your time, you won’t find a comfortable niche in the franchise world.
How do you feel about being micro-managed? While you’re managing your franchise, you yourself will also be managed from above. For example, many companies make operators order supplies from specific providers, even if you can find the same thing cheaper elsewhere. Ever gone into McDonald’s? See the ketchup packets with the McDonald’s logo? The store operator can’t go to Costco to pick up bulk ketchup. He has to buy them directly from McDonald’s – at the corporate price.
There are tremendous benefits to owning a franchise, but you have to consider all the possibilities before taking the plunge.
The Federal Trade Commission has a good publication on franchises, the Consumer Guide to Buying a Franchise, that’s well worth reading. If you plan on buying a franchise, use it and do your research, then make an informed decision.
Have you ever owned or considered owning a franchise? Leave a comment!