A Few Problems with Buying a Franchise

Date AddedFebruary 16, 2010 11:29:40 PM

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A big positive factor for buying a franchise is that you are buying into an already established business model. The model should have already proven itself to be successful for dozens of different franchisees in dozens of different locations. Assistance and advice with financing, site selection and training will, or should, be provided as part of the franchise package. You also will benefit from their advertising campaigns and strong branding.

Some of the disadvantages include: Not having total control over running the business. Your fixed costs may well be higher than that of an independent business because of royalty payments, advertising fees and other requirements that are unique to franchising. It is difficult for you to try out a unique idea if you have one as you must follow the franchisor's business model. If your idea is deemed to be good enough by the franchisor, you may indeed see it incorporated in the franchise model, but you will have to watch it being diluted by all of the other franchisees in the system and perhaps modified beyond recognition.

Another disadvantage of franchising is that they are not cheap. The initial franchise fee will most likely be several tens of thousands of dollars and up to several hundred thousand dollars. It is unlikely that you will be able to save money by looking for second hand equipment or your own style of furniture as the franchisor's model must be followed exactly. Additionally the franchisor may expect you to finance a "Grand Opening", which is as much about brand-building for the franchisee as it is about promoting your individual business.

The fixed fees of royalty and advertising payments also do not let up even if you are having a bad few months. Franchisors differ in how stridently they enforce these payments. Some will allow the payments to be deferred if they believe the situation is temporary but many franchisees, probably most, can enforce the payments ruthlessly even if it means sending the franchisee into liquidation. This enables the franchise location to be sold again to another franchisee and so beginning the cycle all over again. This is known as "churning" and although the phenomenon is rare, it is best to be aware that the practise exists. Normally it is the practice of a franchise system in its death throes and which which is desperately trying to get revenue by any means it can.

Another negative quality of franchising is that the franchise agreement is for a fixed period, often as short as five years. Although the agreement is renewable, one needs to check the franchise agreement carefully as it most likely will be renewable at the franchisor's discretion. A franchisee who has worked hard for five years, suffered through the early loss-making years to eventually build up a profitable business may find that the franchisor decides not to renew the agreement in order to manage the franchise location, and reap the rewards, for themselves.

Although buying a franchise is very often the best way to get into business, one really needs to go in after doing a thorough investigation of the franchise system, the franchisor and his track record and after carefully observing and interviewing as many of the franchisees as possible.