Buying a franchise and starting an independent business from scratch are two very different propositions. While franchisors and many online “franchise guides” tout the benefits of franchise ownership, there are a number of downsides as well. Here is a list of eight ways – good and bad – that owning a franchise is different from starting an independent business:
1. A Recognizable Brand
For most people, one of the primary motivators for buying a franchise is immediate access to a recognizable brand. It can take several years and many thousands of dollars to build a brand that is on par with what some franchisors can offer, and immediate brand recognition can allow you to hit the ground running.
2. A Tested Business System
The second hallmark of a strong franchise is a tested business system. When you buy a franchise, not only are you buying brand recognition, but you are also buying the ability to take advantage of a business system that has proven successful in the past.
3. Training and Operational Support
Access to training and support can be benefits of buying a franchise as well. If your franchise will be your first business venture, having access to these types of resources can add significant value to a franchise acquisition.
4. A Network of Like-Minded Franchisees
As a franchisee, you will likely have access to other franchisees in the franchisor’s system. You can share ideas and gripes, get your questions answered, and benefit from other franchisees’ collective experience.
Of course, the major caveat here is that these are all potential benefits of buying a franchise. All franchise opportunities are different, and some are far better than others.
5. Lack of Control
As a franchisee, you do not have control over all aspects of your business. While you can benefit from having access to the franchisor’s system, you will also have to follow it even if you would prefer otherwise. Additionally, if your franchisor modifies its system standards, you will likely have to comply with the modifications at your expense.
6. Additional Initial and Monthly Costs
When you buy a franchise, you pay an initial franchise fee, and you pay ongoing (typically monthly or weekly) royalty and advertising fees. Initial franchise fees are usually in the tens of thousands of dollars, and royalties and advertising fees generally average out to somewhere around seven percent of gross revenue.
7. Limited Ways Out
If your franchise is unsuccessful, you will only have limited ways out; and, if you terminate early, you may have to pay your franchisor “lost future royalties” for the unexpired portion of your franchise term.
8. Limited Scalability
As a franchisee, the only way to grow beyond your territory is to buy another franchise. If the territory you want is unavailable, you are out of luck. Buying another franchise also means paying another initial franchise fee and signing a new franchise agreement, both of which may be even more franchisor-friendly than they were when you bought your first franchise.
We Provide Legal Representation for Franchisees in All 50 States
Our firm provides legal representation for prospective franchisees in all 50 states nationwide. If you are thinking about buying a franchise and would like more information about the legal risks involved, we encourage you to call 202-293-3947 or contact us online to learn about our fixed-fee franchise business reviews.