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Business Insights

By Sonjui L. Kumar & Samir Patel Email By Sonjui L. Kumar & Samir Patel
July 2009
Business Insights

The sputtering economy is forcing many people to look for opportunities outside the traditional corporate environment. One choice many are considering is investing in a franchise.

Franchises are available for almost any kind of business you may want to start. Besides the common fast food and hotel chains, there are franchises for pre-school education, office supplies, recruiting companies, online retail sales, computer services and many more areas of business. Almost any business you can think of has a regional or local brand you can buy into.

On the face of it, buying a franchise may seem easier than starting your own business, but before putting too much of your time and resources into it, weigh all the pros and cons to make sure owning a franchise is right for you.

The first steps of buying a franchise are much more complicated than buying a stand-alone business. The good news is there are many state and national laws designed to protect the purchaser of a franchise (the “franchisee”). The bad news is that all those laws result in a lot of paperwork that must be read and agreed to by each franchisee. That first package, known as a UFOC (Uniform Franchise Offering Circular) and sent by the seller of the franchise (the “franchisor”), can be overwhelming.

The “Turn Key” advantage and other benefits

While the process of purchasing a franchise may be difficult, it makes many aspects of starting a business much easier. Outside a franchise, when you start your own business, you are required to make a number of important decisions on your own: what will you sell, how much will you price it, what location is good, where will you buy raw materials from, and on and on? You will also be on your own in hiring and training employees, staying up-to-date in your field, and deciding on the marketing and advertising options.

Buying into a franchise takes care of many of these start-up decisions because the franchisor has done it many times and has a blueprint for you to follow. The franchisor will help you pick a location, provide a list of vendors and provide training for your employees. This is commonly referred to as a “turn key” operation, and is seen as the biggest advantage of a franchised business—whereby the new business owner, at least in theory, does not have to undergo a “hatching” period before posting profits.

Franchisors also provide ongoing local and national advertising. Many franchisors will provide updates on issues within their respective fields through a newsletter or a website specifically for franchisees. Regional or national meetings are often held to give you a network and support system not readily available to solo business owners.

Besides these operational benefits, when you buy a franchise, you are buying a tried and true brand. You get the benefit of instant name recognition and the trust associated with it.

The price you pay for the benefits

The downside is that there is a price for all these benefits. Most franchisors charge an initial fee to buy into their brand, and then an ongoing percentage of revenues (known as royalties).

Besides incurring high franchise fees, you also need to give up a lot of control, which may have been one of the main attractions of starting your own business. Franchisors have dozens of policies that must be complied with, including policies about image, advertising, employee training, pricing, and almost every other aspect of the business. In order to keep the franchise, you must remain in compliance with all of them. Just to be sure, every franchisor audits the businesses that carry their brand, giving them a report card and requiring them to renovate or make changes to maintain a certain grade.

Also, since there are many other franchised locations, there is always a risk that an incident that affects one franchise will have an impact on all franchisees. Finally, since franchisors are usually large organizations, when and if a conflict arises between a franchisor and a franchisee, the franchisee is usually on the losing end of the battle.

All new businesses are risky. Generally when you buy a franchise, the risk of failure is reduced because the brand has already been tested and you have a chance to see how the business operates before you open one. However, when you own a franchise, you still have a boss, the franchisor.

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