To Franchise or Not to Franchise: What are the considerations?

There are several ways to start a business. You can have an idea and run with it on your own. You can buy an existing business, or you can purchase a franchise.

According to Merriam-Webster dictionary, a franchise is, “the right or license granted to an individual or group to market a company's goods or services in a particular territory.” When we think of franchises, we often think of McDonalds, Burger King, and 7-11. However, there are all types of Franchises. You will find everything from cooking schools for children Young Chef’s Academy, Energy Efficiency Consulting, Energy Doctors, there is even one to provide business coaching services and advice, AdviCoach! In short, there seems to be a franchise for everything.

Why are there so many franchises? Turning a business into a franchise is easier than ever before and franchising is a good way for the owner to expand their business without supplying all the needed capital investment. However, not all businesses that become a franchise are ready for the expansion. Before it is ready to franchise, a business should be operating with solid profits for several years and have multiple locations running on a set system. Too often, a business’s success relies on the expertise of the owner, rather than the systems that are in place. Since it is the system (along with the rights to sell the products/ services) you would be buying, make sure that it works independently of the original owner. In my opinion, a good franchise model is Five Guys, which started in 1986 and did not start franchising until 2003.

Purchasing a franchise can be expensive. In addition to the initial purchasing fee, a franchise usually requires ongoing royalty and advertising fees, based on a percentage of the franchisee’s profits. Thus, as the franchisee makes more money, so too does the franchisor. This creates a strong incentive for the franchisor to help the franchisee.

One of the most important considerations when deciding to be a franchise owner is the level of entrepreneurial freedom. If you own a McDonalds, you cannot put hot peppers on the hamburgers just because you like them. You have to sell the stated items in the manner prescribed to you. If you like following set procedures, this is great. If you are creative and entrepreneurial in spirit, make sure you understand the limitations set by the franchisor. The franchisee’s inability to change the system can also be detrimental. Like any other business, increased competition, changing consumer habits and changing costs structures can all affect the bottom line for the franchisee. The difference being that it is more difficult to change what and how you sell if you have a franchise because someone else, the franchisor, is making the decisions. An interesting case example of the impact of changing trends and increased competition is the meal assembly market. This is a good cautionary tale of how a franchise may not work.

Factors to Consider:

• What are the start-up costs and royalty fees? How long until you break-even? (Do your own math!)
• Does the business fit your experience and interests?
• What do you get from the franchise (i.e. training, site selection, territory, name recognition, advertising)?
• How solid is the franchise? How old is it? Are sales increasing or decreasing?
• How many franchisees are there? How many are leaving/ why did they leave?
• Will the concept work in your geographic area?
• Can you start a similar business without purchasing a franchise?

Do not do it alone. Have a lawyer review the purchasing agreement with you before you sign.

Owning a franchise can be a great way to become an entrepreneur and make a lot of money. However, like any business venture, it is risky. Remember to do solid research on the franchise, write your own business plan, and get help from experts.