The franchise industry is booming. According to the International Franchise Association’s Franchise Business Economic Outlook for 2016, the number of franchised outlets, number of franchise employees, and gross domestic product (GDP) from franchised businesses all increased more than expected during 2015. Last year’s growth figures exceeded those from 2014, and the International Franchise Association expects to see similar growth in 2016.
For franchisees, the franchise model has its benefits. However, these benefits come with strict limitations as well. So, if you want to own your own business, is a franchise worth it?
Benefits of Buying a Franchise
Talk to any franchise consultant, and you will hear pretty much the same story about why franchising is a smart alternative to building an independent business from the ground up. Generally speaking, the hallmark benefits of buying a franchise include:
- Brand Recognition – Customers who want to know what to expect rely heavily on brand recognition (consciously or not) in deciding where to spend their money. Unlike starting a business from scratch, with a franchise you have instant credibility.
- Proven System – Franchisors offer proven systems, covering everything from site selection and trade dress to point-of-sale technology and back-end financial management. When you buy a franchise, you are buying the right to benefit from the franchisor’s background and expertise.
- Franchisor Support – Franchisors have an interest in making sure their franchisees are successful. Successful outlets mean more royalties and better selling points for new prospective franchisees.
Of course, some franchise systems offer more benefits than others. For example, a well-known franchise like Subway or The UPS Store is going to offer significantly more brand recognition than a fledgling system seeking to tap into a new market. On the other hand, these larger, more-established systems often have higher royalty rates and more heavy-handed operational controls. They also may be less open to negotiating the terms of their franchise agreements. As a result, if you are considering a franchise, it is critical to conduct thorough due diligence so that you can make an informed decision about your five or ten-year (or possibly even longer) commitment.
Red Flags in Franchise Opportunity Due Diligence
Conducting your due diligence on a franchise opportunity involves a number of different steps, from reviewing the FDD and franchise agreement to speaking with current and former franchisees. To measure the benefits (and weigh them against the drawbacks) of any one particular franchise, it is important to carefully assess factors such as:
- Franchise expirations and terminations
- Franchisor financial condition
- Pending trademark litigation
- Renewal and transfer conditions
- Royalty, marketing fund and other fees
- System size, growth and location
- Territory rights
This is just a small sampling of the myriad factors that should influence your franchise buying decision. To learn more, contact the Goldstein Law Firm for a free consultation today.
Inquire About Our Franchise Review and Negotiation Services
Franchise attorney Jeffrey M. Goldstein represents prospective franchisees nationwide in evaluating franchise opportunities and negotiating with their franchisors. If you are considering a franchise, contact us online or call (202) 293-3947 to learn more about our fixed-fee franchise review services today.