Advantages and Disadvantages of Franchising

The best franchisers demand that their franchisees follow the operating manual, with little deviation. If a franchiser has a good idea, and if he has bought into a good franchise system, his franchiser will listen and probably give him an award for a good one, maybe even a reward, but in the end it's up to the franchiser to change the rules or make an exception. That is a good thing.

A strong franchiser has a proven system that shouldn't be changed without serious deliberation and testing. If a franchiser permits you to change the rules without objection, then what are you paying for?

Advantages and Disadvantages of Franchising: What If You Fail?

Yes, it is obvious that buying a good franchise can be rewarding. A franchise owner can become wealthy. So why do franchises scare me? Well, if you fail, you can lose everything you own, and success could mean holding on, just paying the bills and working for less than minimum wage. Why would anyone hang on and work for minimum wage or less, even he has decided that the future of his business is bleak? Simple. Because he has signed a contract with the franchiser, and he is probably on the hook for a bank loan and a lease. It would cost more to shut it down than it would to keep it open and lose money.

My website host has a lively forum where we get together and share ideas. Recently, several of us were discussing the ways that we could be spending our time rather than building websites. Someone chimed in, "Buy a franchise and get an automatic paycheck." That is a scary thought.

Most franchisees go into business with a bank loan, many have mortgaged their homes. They owe royalties on the first dollar of revenue, not profit. Usually there is a percentage of revenue on that first dollar that must be paid for national or regional advertising. They owe vendors for initial stock. Most have employees, so they have to pay for training. Those are just some of the basics. Variable costs could be in the hundreds, if not thousands for opening expenses and the first month in business.

Even if the franchisee went in with cash money, it's usually money than he can't afford to lose - much of it college or retirement savings. He goes into business owing money, not making money. If there is any money to be made it could be a couple years or more to reach break even. Most franchisees are aware of all of this before they sign the contract, but prevailing thought is "if others can do it, I can. I intend to roll up my sleeves and go to work."

Advantages and Disadvantages of Franchising: Failures Work Harder

I have spoken with many franchisees (I have owned two franchises), and I have seen very few franchisees who didn't work hard. Very few franchisees can afford to lose the money, and they will work day and night, seven days a week to hold onto their investment. Yet many fail. And many more tread water. The fact is that the majority of owners of failing franchises work harder than those in successful franchises. It takes more work to try to turn things around, and many can't afford an adequate number of employees to operate efficiently.

Do you pay attention to your strip centers and local malls? Many of the units are occupied by franchises. Of the malls and strip centers than opened for business more than a decade ago, have you noticed that most of the tenants have turned over at least once? Go back twenty years, and you will probably find that most of the tenants have turned over many times. Most of them signed contracts for ten to twenty-five years, and many of those contracts held the franchisee liable for lost royalties on the remaining years of the contract. Many sad stories unfolded behind those walls.

Advantages and Disadvantages of Franchising: True Failure Rates

Be very wary about a franchisee's stated "failure rates." It is almost impossible to know what they really are. The franchiser will often take over failing locations, sometimes paying the franchisee little if anything. Often the franchisee has exhausted his bank account and credit line. He is still bound by the terms of his lease and the franchiser could be threatening to sue for lost royalties for the remaining years of the franchise agreement. This happens a lot.

Visit franchises of your prospective franchiser that have been open for business for several years. Their problems will be yours once the initial thrill of being in business for yourself is over. Some franchisers will give you a list of franchisees to contact. These are usually the best franchises in the system and aren't representative of the majority. Sometimes they are paid shills. A good franchiser will not discourage you from doing due diligence. If you hear any hint of fearfulness from the franchiser that you might talk to the wrong people, throw the franchise agreement in the trash and move on.

Be vary suspicious of any franchiser that will change the terms of the contract for you, even if it is only one word. A good franchiser doesn't have to do that. If you won't sign, he should be able to find someone else. If he can't, what does that say? You are the only one that wants the franchise. That should be telling.

Advantages and Disadvantages of Franchising: The Next Big Thing

Be suspicious of "the next big thing." Remember all of those eBay drop franchises? Remember when meal prep franchises were selling like hotcakes. Remember that franchiser that thought colleges students would pay good money for a breakfast buffet of cold cereal? (You probably don't.) More often than not, a franchiser is not necessary for "the next big thing" because the industry doesn't yet know what works and what doesn't and their name on your sign has no value.

Be vary cautious about buying into a franchise that is vulnerable to technological advances. The new takes over from the old very quickly nowadays. No doubt some bought one hour photo franchises when they were on the way out. Did you notice how fast your local cd/dvd stores disappeared? Remember just a few years ago when Blockbuster was crowded almost every night? Those who bought into Blockbuster early made a lot of money while video rental was hot. Those who bought in later, maybe not.

Advantages and Disadvantages of Franchising: Location

Question whether it's prudent to open a franchise in a location where others have failed with similar operations. Question why a franchiser would think this was wise. Some locations are poor, and it couldn't be known with certainty until someone tried it. Pay attention to what others have learned the hard way. Assuming that you've not bought into a poor business model, the three most important ingredients of a successful business are location, location, and location. Never settle for a location that you have doubts about.

Advantages and Disadvantages of Franchising: Poor Economy Hurts

Be vary cautious about businesses that are seemingly "perfect for a poor economy." Dollar stores come to mind because I was once in that business. This is a terrible time to open one of those because the inventory is dependent on full price stores being inefficient at purchasing. When times get tough, as they are now, retailers get more smart about ordering inventory, so there is less to be rolled out to dollar store wholesalers. If you had bought into that industry long ago, you could have alternate supply channels. Now you will get cheap trinkets from China and cleaning supplies with no profit after shipping is figured in.

When the economy is bad it hurts everybody. Yes, people have to eat, but you can't price a lunch cheaper than McDonald's could if it wanted to or groceries cheaper than Wal-Mart could if it wanted to. What you should do is look at Wal-Mart and figure out what they can't do but people still need. On site windshield repair, just for example.

It is true that opening a good business in a poor economy can be beneficial in the log run. You have more bargaining power and maybe less competition. Just be sure that you are buying into a good business model and can afford to wait on better times. In an economy like this I had rather play it safe an open low cost operations with little risk.

The Internet is a tool that franchisers fear. Before the Internet they could for the most part control the media. Sometimes an owner's plight would make the local papers. Occasionally a story might get published in a national publication. Today, anybody can tell their story and it will live forever on web. There are websites to study and forums where you can ask questions. When your financial future is at stake, you can't do too much research. I have other pages on this site where the start-up costs for a new business venture are so small and the risks are so low, that you can do like the Nike ad recommends "Just do it!" Not franchising.

If you get far enough into your franchise business opportunity to make it to Open House or Discovery Day or whatever your prospective franchiser calls their first face-face-meeting with you, don't sign any contracts then. Don't get caught up in their excitement that they might have someone else to write them a check. Go back home and think about it for awhile. Get back on the net. Use Google. Act in haste, sometimes means you will repent at leisure.

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