Franchise ownership carries risks and rewards

 

Published in The Tennessean February 23, 2015

By Ed Rappuhn – SCORE Nashville

“I want to start a business and am considering a franchise instead of an independent start-up. Is this a good idea?”

Maybe. Let’s look at the plusses and minuses of opening a franchise.

On the plus side, a franchise has a brand that has proven successful and can be cloned in new markets. Usually there are marketing campaigns built for the brand that you can use locally, or in some cases are already being used nationally.

A franchise has been successful elsewhere and this can help you get a loan that might not be available for an independent start-up. You can show the bank real financial results from franchises in comparable markets. Regardless of your research and planning, it’s hard to be as accurate in predicting financial results for a brand new business.

Although experience in the business is recommended, many franchises offer training to help you succeed. You also have a built in peer group with whom to share ideas that have worked, and those that haven’t.

The product or service offered by a franchise should have a consistent level of quality; customers should know what they are getting.

On the minus side, a consistent product also makes it difficult to adjust offerings to meet the tastes of your market since franchisors may discourage or prohibit additions or modifications. It’s also possible that you will be required to buy from specific suppliers with no control over pricing.

Not all franchises meet with equal success in different markets. Whether it’s tastes, climate, or interests, make sure customers in your market will be receptive to the franchise’s offerings.

The franchisor might exaggerate expectations by providing financial results from better performing franchises. You absolutely need to perform due diligence to ensure realistic projections.

Problems in other markets can negatively affect you. If there is an incident or bad experience elsewhere, it can cause a backlash.

There are initial and ongoing fees that you will pay to the franchisor that don’t exist in a stand-alone business. Are those fees are reasonable and cost effective? Are ongoing fees subject to change? You can’t back out of the agreement until your contract expires. Even then, there might be a non-compete clause.

Finally, what restrictions are placed on you when you decide to sell or transfer your business? Do you need to sell back to the franchisor or get approval on the buyer? These restrictions can lower your selling price.

There is no right or wrong answer to the question of whether buying a franchise is better than opening your own business. Generally, the franchise route has less risk, but can also limit your rewards. What works best for you and your psyche?

Ed Rappuhn is a mentor, workshop facilitator, and the past-chair of SCORE Nashville. SCORE mentors guide entrepreneurs in starting and growing their businesses. Sign up for a free SCORE mentor, find out about our reasonably priced workshops and other services, or volunteer to become a SCORE member at www.scorenashville.org .