Franchising – Benefits and Limits
Franchising is a very exciting way
for a person to be an entrepreneur while having a very set structure of how to operate
the business and back office support from franchise’s parent company. While franchising
may allow people to own a business, there are several drawbacks that you may face
if you decide to buy into a franchise.
First, of course, the legal disclaimer
Please note that the information
in this article is not to be used as consulting, accounting, or legal advice. The
following information is provided with the understanding that this article is not
a substitute for professional advice, and is merely for informational purposes.
TheFinanceResource.com is not responsible for the use of any information contained
below or for the factual accuracy of any statements made below.
Franchising is not a new concept,
and the roots of franchising can be traced back to the early 20th century. If you
were a kid that had a paper route, then you were briefly introduced into the world
of franchising. By buying into a franchise, you are purchasing the right to use
the business’s concept, operating plans, business plan, logos, and marketing campaigns
for your business. In exchange for this right, you will have to pay an initial franchise
fee (ranging from $2,500 to $200,000 depending on the franchise), plus ongoing payments
(or royalties) to the franchising company. These royalties usually range from five
to ten percent depending on the reputation of the franchise and whether or not your
royalty payments include marketing support. If you are interested in purchasing
a franchise, you should ask the Company to provide you with an up to date copy of
their Uniform Franchise Offering Circular (or “UFOC”).
This is a legal document that has
been usually filed with the state’s securities or corporations department. Each
state has different rules regarding the information that must be contained in the
circular, and if you are uncertain of the language contained in the UFOC, you should
hire a lawyer to help you understand all of the legal jargon. In this document,
you will see all of the terms between you and a franchiser, including expected startup
costs, the initial franchise fee, the ongoing royalty payments, and other requirements
that may be required of you. Many franchises require that a new franchisee attend
a training seminar at their corporate headquarters (or other location) before they
can begin development of their franchise.
For entrepreneurs that do not have
much business experience, franchises can provide an easy entry into a new market
with minimal risk. Popular franchises enjoy wide brand recognition, and can provide
you and your family with a stable investment that will provide you with years of
income and financial security. Once you decide to leave the business, you can sell
your established franchise for a significant earnings multiple.
Many franchisees buy into a franchise
agreement with the intent to develop a number of locations throughout their regional
area. This is an important fact for a potential entrepreneur because franchiser
companies cherish trained people that can develop markets without having to shoulder
very much capital risk. When you buy into a franchise, you are accepting the substantial
capital risk associated with starting a business in a new market. This capital risk
is alleviated through the back office and marketing support provided by the franchising
Each franchising company provides
varying levels of support and marketing. This is also true for the latitude granted
to the entrepreneur for making business decisions. Each part of your business has
been carefully planned, including the method of operation, approximately salaries
to be paid, costs for materials or inventory, pricing of products/services, royalty
fees, and your ability to purchase or start additional franchises. Franchisers often
grant their franchisees a protected territory, which protects you from having another
franchisee start a business in your territory. This is important because it provides
with the assurance that you will have exclusive access to your market with the brand
name, logos, and products offered through the franchise. Banks are very keen for
lending to entrepreneurs. This is primarily due to the fact the risks associated
with well known franchises are several reduced because the business concept has
been proven, other franchisees have developed profitable businesses using the business
models provided by the franchiser, and the brand name is well known among consumers.
Many lending institutions have several SBA and traditional lending programs that
are specifically geared to entrepreneurs.
In conclusion, franchising is an
excellent way to acquire or start a new business. The risks of franchising are far
lower than that of starting to own your own business. However, there are many drawbacks
as well, and it is important to remember that you will not have 100% control of
your business. In a sense, you are becoming a manager of a store that you happen
to own. You will be required to follow many instructions and you will be bound by
an extensive contract that prohibits certain business decisions, regardless of how
good they may be. Banks and lenders are very happy to lend to franchised businesses,
and if you an entrepreneur with limited experience, the world of franchising may
be for you.