Advantages and Disadvantages of Buying a Franchise
Starting a new commercial venture from the ground up can be very difficult. It usually starts with doing a lot of research and composing a business plan. Even if that goes well, it can still be a struggle to promote your business and attract customers. This is why some people choose to begin their entrepreneurial journey by purchasing a pre-existing franchise. To help you make the best decision regarding your future business, we will be looking at the advantages and disadvantages of buying a franchise.
What is a franchise?
Before we delve deeper into the pros and cons of such a purchase, let’s first take a moment and define what a franchise is. A franchise represents a type of intangible asset that you can buy to gain access to the business knowledge regarding the process of creating a product or performing a service from the original franchisor. You will also be able to use their trademarks and sell under their business name. Most franchise licenses come with an initial setup fee as well as licensing fees, which are usually paid yearly.
The advantages of buying a franchise:
1. Most of the initial work has already been done
Since you are buying into a franchise, you’ll get access to how the products are made and services structured. The franchisor will probably have a network of contacts that you can rely on. This can include developed relationships with providers of materials or raw goods, as well as established delivery and supply chains. When you are part of a franchise, it’s not uncommon to be able to secure better deals at a lower cost than you would be able to as an independent business.
Buying a franchise means also buying the business model.
2. You’ll need less experience to run a franchise
New businesses constantly need to test different approaches to see what works. It can take a long time to develop a functional business model. Unfortunately, not every business owner has the financial runway to get that far, and they just can’t afford to experiment. Businesses that cannot find their footing fast enough are often forced to close down.
Thankfully, when it comes to franchises, the business model has already been tried out and has stood the test of time. Depending on the size of the original franchisor’s business, it may have already deployed in different markets. This means that most of the problems you will run into have already been solved by the original franchise owner. You will be able to rely on their experience and support, which may come in handy to new and inexperienced business owners.
Franchisors can also help you with the training and education of new hires. They might even have established a recruitment infrastructure to help you find new employees. Another benefit that is common when it comes to franchises is access to seminars, conventions, and annual meet-ups. These represent great opportunities to gain new skills, and you’ll also be able to network with other franchise owners.
You will be able to attend seminars to gain new knowledge and skills.
3. The associated risks are lower
One of the main advantages of buying a franchise is that you are also buying an already established brand. Thanks to this, when you hit the market, you will be facing a receptive customer base due in no small part to brand recognition. Banks see franchises as low-risk ventures, and they won’t be scared to grant loans even when the market is unsteady. Moneylenders will be more willing to give you a loan, especially if you are purchasing a well-known and successful franchise.
The disadvantages of buying a franchise:
1. Less freedom to run your franchise
Certain franchisors will demand a considerable level of control regarding how your franchise is run. There may even be restrictions regarding where you can set up and open your franchise. Although it may initially sound strange, it’s somewhat understandable since the franchisor wants the franchise to perform well.
They may require you to set up shop in a city or region which caters to their target demographic and doesn’t already have a franchise in the area. In this case, you might need to move, and if you already possess business inventory, we recommend hiring commercial movers. They can help you settle down in your new business space without too much stress. This will give you the peace of mind to focus on getting your business up and running.
The franchise agreement will set boundaries on how you can run your business, and you might have very little room to make independent decisions. Fortunately, you will know that information in advance, so you can judge if you are comfortable operating under those conditions.
There can be limitations to what kind of office or production facility you can use for your franchise.
2. Additional costs
We already mentioned that you need to pay an initial fee to buy a franchise and that you can also expect to pay annual fees as well. However, there will be some additional costs that you should be aware of. You will need to share a part of your profit with the franchisor in the form of royalties. They represent a percentage of your monthly profit and usually range between 4 and 12 percent.
Another thing that many new business owners forget is that you will also need a venue to operate out of. There may be requirements regarding the type of commercial properties you can run your franchise in, so you might want to consult with a Tampa agent who can help you find appropriate properties. Unfortunately, some franchisors have set rates for business expenditures, like advertising or a minimal number of orders. Make sure to factor them in when creating your business plan.
Now that we’ve examined the advantages and disadvantages of buying a franchise, you should have a pretty good idea of what you are getting into. Franchises represent low-risk business ventures, which may be perfect for young entrepreneurs. Obviously, there will be a tradeoff, and franchises come with some limitations. Try to weigh all the pros and cons and carefully go through the franchise agreement details before committing to anything.
Meta description: Before you open up your own business you should find out the advantages and disadvantages of buying a franchise to see if it’s the right decision for you.