To Franchise or Not to Franchise
Many prospective entrepreneurs are faced with a crucial choice - should they start a company from scratch or invest in a proven method of doing business by opening a franchise?
A franchise is essentially an individually owned business, operated under guidelines provided by another company known as the franchisor. Tapping the resources of an established organization can significantly reduce investment risk, but at a price. Franchisees must give up a great deal of independence and follow set rules and regulations.
Recipe for success. The franchise formula has already been proven to work in the marketplace. A franchisee also benefits from the greater efficiency and profitability that results from uniform coordination
Access to financing. Franchisors will typically help entrepreneurs get financing for franchises. In limited cases, the franchisor itself will be the source of financing. If entrepreneurs seek outside financing, lenders tend to be more receptive because franchises are often perceived as less risky businesses than unproven start-ups
Support. Franchisors provide training programs to help entrepreneurs learn all aspects of running a franchise. They also offer assistance in choosing a location, negotiating leases, setting up the business, and training personnel
Instant name recognition. Franchisors conduct advertising, often on a national scale, for the benefit of their franchisees. A well-known name gives a new business a jump-start. In many cases, potential customers of a franchise already know what products and services it provides
Cost savings. Because large companies buy goods in large quantities, they can pass the savings on to their franchisees
- Lack of independence. Franchisees must give up significant control of their businesses because the franchiser has the final word on how franchises must operate. The franchisor may dictate which products and services can be offered, which signage and advertisements can be used, and which design and appearance standards must be followed. The company may also have rules regarding hours of operation, dress codes, and bookkeeping procedures
High costs. Franchisees have to pay an initial franchise fee to purchase the franchise. Other initial costs may include equipping the space, purchasing inventory, and buying insurance. Once the business is up and running, franchisees typically have to pay a percentage of the gross monthly sales to the franchisor. Some franchisees must also contribute to a regional and national advertising fund.
No guarantees of renewal. A franchise contract is for a limited time, typically 15 to 20 years. At the expiration of the franchise agreement, the franchisor is under no obligation to offer the same terms and conditions as the original agreement or to renew it at all. The franchisor can also break the agreement if the franchisee fails to pay royalties or operate according to standards.
Aspiring business owners should consider the many advantages and disadvantages of operating a franchise before making the initial investment. In many respects, a franchise is an appealing option that provides a strong framework for success. However, for others who long to exercise their own business judgment, a franchise might not be the right opportunity.
For more information, contact your relationship manager.