Pros and Cons of Opening a Franchise



Opening a franchise is a way to get a head start and hit the ground running with a new business rather than having to start from scratch.

Franchises have always been a popular option among entrepreneurs because they come with their own template and business plan, plus a home office that is there to help you get set up and maintain your business.

But opening a franchise isn’t for everyone.  As you’ll see below, there are pros and cons to opening a franchise and you should consider them all carefully before jumping into the deep end.

Pros to Opening a Franchise

Brand Awareness.  Perhaps the biggest advantage a franchise has over a traditional business is that it comes with built-in brand awareness.  Open a Dunkin Donuts and you’ll have people stopping in for their morning caffeine fix without much advertising on your part.  You’ll have a known brand with an already established customer base who knows what to expect from you.

If you open a coffee shop on your own you will start with zero customers and it will take some time to build up a loyal following.  You’ll spend a lot more time marketing and trying to acquire new customers, which means you’ll have less time left for everything else.

Turnkey System.  Franchises offer a proven system for operating a business and generating profits.  Sticking to a proven template can help you avoid expensive mistakes and build a business that will last.

Collective Buying.  A franchise group with many locations and supply needs can negotiate much lower costs for equipment and inventory.  Independent business owners generally do not have the same kind of bargaining power with suppliers.

Home Office Support.  A good franchise will always be there to guide you.  They’ll set you up with an easy to use system, provide advice, and answer any questions you have along the way.  Franchisees can take comfort knowing they have somewhere to turn when they run into problems.

Of course, opening a franchise isn’t all rainbows and jelly beans.  There are some disadvantages too…

Cons of Opening a Franchise

Higher Startup Costs.  Opening a franchise, especially one that is large and well-known, can be prohibitively expensive and the costs are beyond many potential business owners.  They typically come with an upfront franchise fee as well as regular royalty payments.  You may also have to spend on construction and equipment.

For example, if you look at a Subway franchise cost breakdown you’ll see that total estimated costs of opening a Subway franchise including building improvements, signage, equipment, inventory, supplies, insurance, and other expenses can range from $115,000 to $250,800. And that is just to get the door open.

Royalty Payments.  A portion of each sale you make gets paid back to the home office.  The royalty percentage varies from one franchise to the next but as an example Subway’s royalty payment is 12.5 percent every week (8 percent in royalties and 4.5 percent in mandatory shared advertising).

Less Freedom.  One of the benefits of opening a franchise is that you get a proven business-in-a-box template to follow.  But the trade-off is that you have a lot less freedom.  Independent business owners are free to make any and all decisions themselves, but franchisees have to keep things inside the box.

Let’s say you run a McDonald’s franchise and you come up with a fantastic idea for a new burger.  While an independent business owner would be free to add it to his menu you wouldn’t.  At best you could suggest it to the home office and hope they approve your idea.  Some entrepreneurs just don’t like the restrictions that come with a franchise and would rather have the freedom to do things their own way.

Out of Touch or Inefficient Home Office.  Like it or not, as a franchise owner you’re dependent on the franchisor for success.  Poor decisions made by the home office can sink your business too.   Just imagine having people protest outside your Chick-Fil-A restaurant because of something the franchisor said.

Perhaps they aren’t shrewd negotiators and you end up paying more for supplies than you would if you picked them up yourself at the local Costco.  Or maybe they’ve been sitting in an office for so long that they’ve forgotten what it likes to be on the front lines inside a store and their ideas are out of touch with reality.

As you can see franchises come with both advantages and disadvantages.  Before you make any financial commitments you should do your due diligence and spend some time researching your options.  Speak to a few current franchisees and get their feel for what they like and dislike about the operation.  If possible, you should also try to talk to a few former owners and find out what made them leave.

Have you ever considered opening a franchise?  If so, what kind?

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Mike is a freelance writer and blogger who specializes in finance and parenting topics. He is a dedicated husband and father of three who is obsessed with creating multiple streams of income and building wealth so he can achieve true financial freedom for his family. Like what you're reading? Subscribe to our free RSS feed and follow us on Twitter.

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Comments

  1. Hi Mike,
    Thanks for sharing this post on franchising with the BizSugar community. Franchising does indeed represent one way to move into small business ownership without needing to create a whole new business model first. You may also want to check out Joel Libava, The Franchise King, another member of our small business community and a great person to reach out and connect with. Hope to see a lot more contributions from you here at BizSugar.

  2. So Mike, are you considering something like this? I toyed with the idea years ago, but came to the conclusion that most brick and mortar places would require a substanial time commitment. If you pick the right one though it can certainly be lucrative.

    • hey Geoff! Nah, I talked about it with a couple of buddies but we decided it required too much capital to start and just too much overhead. I prefer the onlune business model with low expenses but large potential.

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