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The Pros and Cons of Franchising

Opening a franchise can be a lower-risk way to start a small business, but it’s not for everyone. For one thing, franchisees have to abide by company rules and the terms of their licensing agreements, so if you love to be independent, opening a franchise might not be your best bet. Find out more about the pros and cons of franchising below. 

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Pro 1: Franchises come with a ready-made business plan.

If you want to start a business but you don’t relish the process of crafting a business plan, choosing what to sell, decorating your store and all the other minutiae involved in setting up an independent shop, buying a franchise might be good option for you. Becoming a franchisee offers a lot of the benefits of starting a small business without some of the start-up headaches.

Pro 2: Starting a franchise can make it easier to secure financing. 

The Pros and Cons of Franchising

Some franchised businesses have their own financing arm, meaning that they provide loans for people who want to buy and open a franchise. Now, in-house franchise financing might not always offer the lowest interest rates, and it’s always a good idea to comparison shop. But if you think you might have a tough time getting a traditional small business loan from a bank, going the franchise route can be a good work-around.

Related Article: The Difference Between a Franchise and an Affiliate

Pro 3: Franchises are less risky than independent businesses.

If you buy a franchise, you already know that the product is successful. It has brand recognition, for one thing. Assuming the franchise is in a good location and the brand continues to attract customers you should have a pretty solid business on your hands. If you want to be a small business owner but you don’t want to risk a lot of time and capital on a venture that could fail, you might be drawn to franchising.

Pro 4: It’s easier to get advice about a franchise.

If you’re considering becoming a franchisee, you can talk to other people who have done the same or read about their experiences online. You can get guidance and learn from the mistakes of others who have opened up branches of the same franchise. Of course, if you open an independent small business you can get general advice, but you’ll have access to more tailored tips with a franchise.

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Con 1: Franchises can come with high start-up costs.

Starting a franchise might involve higher start-up costs than you would incur if you started an independent small business. If you’re trying to start a small business without taking out a hefty loan or putting a lot of your own capital on the line, becoming a franchisee might not be your best option. Before you commit to one form of business or the other, it’s worth doing a cost comparison.

Con 2: You have less flexibility with a franchise.

When you become a franchisee you have to abide by the rules of the franchisor and keep to the terms of your licensing agreement. You can’t shake up things like the products you carry, the decor of your store and the uniforms the staff wear. With a franchise, you have less scope for innovation and for personalizing your business.

Con 3: Franchise fees can really add up. 

The Pros and Cons of Franchising

Franchisors don’t let you take their logo and run with it. You’ll owe fees to the business from which you buy the franchise. A portion of each month’s profits will leave your coffers and go to the franchisor, per your licensing agreement. Those fees can add up, which is why it’s a good idea to enlist the services of a lawyer to help you get a good deal on your franchise. If you’re fee-averse, you might decide to forgo a franchise altogether.

Con 4: The fate of your business isn’t entirely in your control.

Franchisees benefit from the brand recognition of the company whose franchise they buy, but they’re also vulnerable if the public turns against that brand. Health scares at another franchise branch, corporate scandals and more can all leave franchisees vulnerable and put their profits in jeopardy.

Bottom Line

Becoming a franchisee is a good fit for some and a bad idea for others. Before you commit, it’s a good idea to weigh the pros and cons, do your research and seek legal advice. Different franchisors may offer radically different terms and conditions, so it pays to comparison shop.

Photo credit: ©iStock.com/PIKSEL, ©iStock.com/Mckyartstudio, ©iStock.com/Zerbor

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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