There’s a lot of hype around the idea– buying a percentage ownership of a business that is perhaps receiving guidance and support from a parent business entity. But what really are the benefits of buying into a franchise, what are the risks involved that aren’t usually mentioned, and how can you start buying into a franchise today? Let’s have a look.
1. What is a franchise?
Google defines a franchise as an authorization granted by a government or company to an individual or group enabling them to carry out specified commercial activities, e.g., providing a broadcasting service or acting as an agent for a company’s products. In basic terms, this means that you, as an individual, can purchase and own a percentage of a business that is also owned by a parent entity, meaning you would be a partner with them on that particular business property. From the parent companies perspective, bringing on a franchise owner means they can put off much of the management tasks to you, and free up their own bandwidth to focus on expanding their product lines, etc. For the business owner (you), it means you have support from a (hopefully) well established parent company that is able to get you all the resources you need to succeed. Of course, the legal ownership of the business is split, with exact percentages depending on the terms of your deal. This is all typically decided in the negotiation phase, and it’s advised to speak with investing real estate and business professionals before signing any legally binding contracts.
2. How does a franchise differ from traditional chains?
Traditional chain businesses (restaurants, grocery stores, etc) differ from franchises in that they oversee and handle all business hiring operations from a standardized, corporate level. Meaning that the hiring process to work at a chain grocery store will be very much the same, regardless of which location someone is applying to. From the company’s perspective, this helps mitigate risk by instilling a standardized hiring and management system across all of their locations, which allows for more consistent and insightful site-performance tracking. It also means they can better optimize their time, allocating resources to more important, time intensive tasks. Usually, chains are much more financially established than franchises because having a full time series of teams oversee multiple sites, can be costly. Franchises on the other hand (as mentioned in section one), give independent business owners the freedom to conduct their own hiring process (in many cases), as well as other, site specific operations.
3. Pros and cons of being a franchise owner
Like any kind of investment, there are pros and cons, as well as risks to be mindful of, in order to prevent financial loss. Here’s a quick and dirty overview of the pros of buying into a franchise:
- Skip the startup phase
- Instant name recognition (marketing)
- Help with marketing from parent company
- Easier access to financing
Franchise owners have a big brother at all times, willing to lend a helping hand to the business owner, in light of the fact that their success depends on your own personal success leading the franchise. You get to skip the startup phase, not having to build a business from the ground up. This also infers name recognition, which makes it easier to be identified by customers. Franchise owners also have marketing support from their parent owners, offering them a variety of creative assets, as well as financing. The finance benefits also go beyond marketing, as franchise owners can request operational upgrades, new equipment, etc.
Inversely, there are also some cons to buying into a franchise, and I suggest you first evaluate your long term goals before deciding whether or not to proceed with such a business venture.
- Abiding by franchises rules
- High upfront costs
- Possible royalty payments
- Reputation issues
Although you do have a lot of freedom as a franchise owner, you still have certain requirements and rules to abide by, that are set in place by the parent company. This could look like requirements to uphold health and safety standards, as well as mandatory minimum stock quantities. Each company will be different, so it’s important to know these expectations up front. There are also higher upfront costs associated with a franchise, specifically in that you have to make an investment to own it- which is unlike a startup, where you can start building something today, for free. There are also possible royalty payments that need to be made, if you utilize the brand logos, typefaces, product names, etc. Again, these will all be outlined in the agreement docs. Lastly, be mindful that although you are owning and managing this franchise, actions taken by the company will directly reflect on your business. Any sort of negative legal backlash or press could result in an immediate loss of customers, or perhaps even closure.
4. How to begin the process of buying into a franchise
To begin buying into a franchise, my first suggestion is to evaluate what your short and long term goals are- if you hope to get in and out of a quick investment, a franchise might not be the best for you. However if you want to partner with a company and build an ongoing, successful business, then it can certainly be a good way to get your money up. As you consider your plans and goals, consider reaching out to a business consultant team like ours, and we can help point you in the right direction of where to look. Our teams can be contacted at firstname.lastname@example.org. Good luck, and godspeed!