Thinking of Buying a Franchise?
The Pro’s and Con’s

by Bob Stewart

Mr. Stewart is Managing Director of a British recruitment and outplacement firm. As a former franchisee Mr. Stewart offers his insight and advice regarding franchising. Whether in Pounds or Dollars the message is the same.

Many people have the urge to start and run their own business. I am involved in career counseling and meet people who express this desire very frequently. The most common barrier is that people do not quite know what exactly they wish to do or what is involved.  I also believe that even if that barrier is resolved, most people do not have all of the skills at their fingertips to get a start-up business off the ground to be a viable business. By viable I mean a business that fulfils their desire and, most importantly, creates a sustainable income for them. Having a good idea for a product or service does not mean you have a viable business.

Franchise – A viable option worth considering.

One very real option that is worth considering is buying into a franchise.  The benefits are well documented. Franchises come in all shapes, sizes, costs and commitment.  If you have never looked at the options then I believe you will be quite surprised at the breadth and depth of these. There are many website that will show the varied options available. They vary from low skill to very high skill businesses and vary in prices from a modest investment to many thousands of pounds.

The Pros and Cons of franchises:

Firstly let me outline the benefits of buying into a franchise. You are buying into a proven business model.  That is to say that the seller (known as the franchisor) has already shown that their product or service works. By that I mean that they have demonstrated a working version of their business.  Specifically they will have customers and show that people buy the product or service.  Most importantly that they are able to demonstrate the profitability of the business that they are offering to franchise. They will have a documented ‘system’ that is part of their offering.  The concept is that by following this system, you too can create a similar business. They will train you as part of your package. This training should be comprehensive and cover all aspects of the business.  This would normally cover such things as marketing the service to find and attract customers, hiring, training your employees, financial control & book keeping, pricing and of course the detail of how to successfully deliver the product or service that your will be offering. Additionally they should keep you up to date with any new ideas and innovative approaches. In other words they should train and equip you with all the necessary skills to successfully run your business and create profit. Many franchises are well known global brands.  Selling under their banner gives far greater instant credibility to your ‘little start up businesses. This is a win-win situation. The individuals who buy into a franchise are of course highly motivated as they have invested their own money.  It is in the interest of the franchisor to help you succeed as they will enjoy a return on your business over time by charging and ongoing ‘Royalty’ fee.

Now let me look at the disadvantages of franchises.

You are locked into a contract that often does not allow you to have much flexibility on your offering. Taking a simple example, if your franchise was a well known global burger supplier, you could not start selling your own burger variants to your customers in your outlet.  This is fair and reasonable as it would start to cloud the offering of the well known brand. This is not usually a problem, but it underlines the lack of true entrepreneurial spirit that some people find restrictive.

The on-going royalty payments are typically in the region of 7 to 10% of your turnover.  Note ‘turnover’ not profit. That means that you could be turning over a large sum but making very little profit, particularly in your initial months or during tough times.  However, you still need to continue to pay the franchisor their fee based on your turnover.  That can be crippling if there is very little profit. Franchisors do vary in their offering quality, support and even their ethical standards.  Like all things in life there are the good, the bad and the ugly.  Make sure that you do ‘due diligence’ in researching the franchisor before you part with any money. You can always walk away from a franchise if it is not working for you but that is an expensive path that no one should take.  You cannot normally start up in competition to your franchisor as you will normally sign away the right to do that when you sign the franchise agreement.

How bad can it get? Well I purchased a franchise and things were fine until another company purchased the franchisor.  That is a take-over by a new controlling company.  Overnight I suddenly had a new franchisor.  That is not necessarily a problem, but in this particular case the new owners had some very questionable ethical standards and business practices that were disastrous.  They misrepresented the truth for years, they encouraged interworking with other people they falsely represented as good franchisees, which not only had expired franchise agreements but were in growing and massive debt to the franchiser.  That was only the tip of the iceberg. 

Due Diligence.  When you approach a franchisor they will sell all the positive aspects of their offering.  Nothing wrong with that – they are trying to sell their franchise.  But that paints a one sided view.  They may point you towards some franchises that are working well.  Again that is fine and you should visit them and quiz them.  However, what I believe you must do is to visit other franchisees too. Ideally, some old and some new and definitely a cross section of those that are doing less well.  These people are likely to tell you their side of the picture with no-holds barred.  What you must do is take a balanced view on the issues and problems that are raised.  Are they just winging it because they are not really up to the task or have they a justified issue that the franchisor is failing to address?  Make no mistake about it; running a successful business is no easy task, even with help from your franchisor. So try to distinguish between real issues and individuals inadequacies.

Research the company on the Internet.  I do not mean look at their website, I mean search on Google for the ‘the franchise name’ Views or Comments or Opinions. You may be surprised what you find out.  Again take the balanced view about what you read.

Last of all do not think that any business is easy or simple to run. Whilst franchises have a better success rate than simple start-up businesses, they still fail. It takes hard work and a balance of many skills.  However, many do succeed.  Good luck.

Bob Stewart is Managing Director of RSM International. A London based firm that provides outplacement, career counseling and executive search services. Mr. Stewart can be reached at bob.stewart@rms-international.com