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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 prefer to be independent, opening a franchise might not be your best bet. However, if you decide to apply to open a franchise, there are a number of hoops you’ll need to jump through to make it a reality.

What Is Franchising?

Franchising gives aspiring business owners the ability to buy into a much larger company and become the owner of one or more locations of that business. A franchisee could be one person or a group of people buying into a franchise together. The franchisee agrees to terms with the larger company on how the business will be run, and in turn they receive the right to operate under that company’s name, logo, reputation etc. They’ll also receive marketing materials, a location, supplies and more.

Generally speaking, the process of opening a franchise location involves applications, interviews, background checks and more. While this might sound similar to the process of getting a job, the major difference is that franchisees also need the cash to back up their deal. For instance, McDonald’s requires franchisees to have at least $500,000 in liquid assets and pay a $45,000 franchise fee.

Below, we break down the pros and cons of franchising for those looking into the process.

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. 

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.

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.

Pros and Cons of Franchising

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.

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 look 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. 

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.

Pros and Cons of Franchising

Franchisees benefit from the brand recognition of the company whose franchise they buy. However, this also makes them vulnerable if the public turns against that brand. Therefore, your franchise is dependent on the current state of the larger company, as opposed to being able to manage your reputation with your own business. 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 idea for some, and a bad one 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.

Tips for Managing a Business

  • Some financial advisors specialize in working with business owners. Managing your personal and business finances with the help of a professional could be welcome during what’s normally a difficult time. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • The process for becoming a franchisee is rife with red tape and multiple applications. Check out SmartAsset’s guide to buying a franchise to prepare yourself beforehand.

Photo credit: ©iStock.com/PIKSEL, ©iStock.com/kate_sept2004, ©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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