Listen ladies and gentlemen, I’m pretty biased when it comes to franchises. I hope to invest in a few as time goes on.
I like the idea of being able to “own” and run a business that already has nationwide notoriety. Having advertising that has been priming the masses long before I have even decided on which franchising company’s rights to buy is very appealing.
However, there are things to consider when buying into a franchise. It wouldn’t be right for me to sing the praises of franchising without also pointing out the issues as well.
Here are some things to be aware of:
1. Initial startup investment can be high
All franchisors charge initial startup fees. Some of these franchisors will charge fees that are extraordinarily high. (See Chipotle) What is worse, you may not get that money back if things don’t work out, which means you can stand to lose tens of thousands of dollars.
See www.entrepreneur.com/franchise500 for top franchises and Initial startup fees
Don’t forget that there’s other costs involved in running a typical business that you have to shell out money for. The cost of housing your operation is your responsibility too. Depending on the franchise you choose to own, you may need a large building (Hotel chain) or a small section in a mall’s food court (Taco Bell).
2. The locations you choose to operate in is not guaranteed be profitable
Franchisors, no matter how well recognized and well liked, can not promise you that their franchise will be profitable in the area you set up shop in. They can only give you generalized figures of what their franchises make. These numbers, regardless of how promising they may look, don’t necessarily mean you will turn the same level of profit.
3. Too much friendly competition
This was a running joke in the past, especially in places like New York, where you could find a Starbucks coffee shop on all four corners of any given intersection. Although it’s funny to us the consumer, it is less that comedic to us the entrepreneur. Though I heard that some franchisors try to space out the proximity one of it’s brands has to another, there’s no written law stating that they have to. Your Subway or 7/11 could be in stumbling distance from another franchisee’s.
4. Royalty payments?
Yup, royalties. Again, how else is the Franchisor supposed to make money? Expect a percent of your gross sales to be a tribute to the franchisor, in exchange for continuing to use their name, trademarks, and advertising. Consider it the cost of doing business, and less like mafia protection money. Although it’s hard not to look at it that way.
5. Exclusive supplies
What this simply means, is that your supplies and goods come from your franchisor. All food, all cleaning supplies, among other things are supplied by the franchisor, and usually for a premium. How else do you expect franchisors to make money? And you can forget shopping for the cheapest prices elsewhere. That would be a breach of terms.
6. Mandatory arbitration clauses
To sum things up… Once you sign on the dotted line, you can’t sue or take legal action if you feel you were acted upon unfairly by the franchisor.
7. Leave your creativity at home
When running your own franchise, it is your business, but you have no control or say so about how things run. You basically bought into a cookie cutter company, designed in the image of the franchisor’s plan of operation. Everything that you do within your franchise has to fall inline with the brand’s image.
This will likely keep your desire to be creative under wraps.
8. No escape
When you sign all the paperwork and become the proud owner of your first franchise, you have likely signed your life away. Well, not literally. However, you are committed to the franchise for a set term, which can last up to 30 years. Getting out of the franchise contract is very difficult (unless you are terminated).
9. Immediate Termination
While it is difficult to get out of a franchising contract by choice, the franchisor can cut ties with you rather easily. Usually, if you break the terms of your franchising agreement, there’s a chance that your business will be on the line. Especially if the offense is serious. Since the franchisor drew up the contract, it will likely favor them over you. They are less likely to break any contract agreements during their daily operations. Entrepreneurs who are hoping to increase their bottom line can, on the other hand. Termination is a possible consequence.
10. No competition!
No, no, no. Not for you. For them, the franchisor. When you decide (or have no choice) to leave your franchising business behind, you will likely have signed a legally binding clause. By signing a Non-compete Agreement, you are not allowed to take the built up knowledge you gained from owning a MC Donald’s franchise to start your own burger joint. You will have to put those dreams on the shelf for a few years. The clause terms vary from brand to brand.
Friends, don’t let this list scare you away from joining with a brand and running your own franchise. Sure, the stuff in this list can be dissuading, but in many cases, you won’t have to deal with some of the things listed.
Most who decide that playing in the house that Ray Croc built is what they want to do, understand that they will have to play by MC Donald’s rules. Let this list be a beacon of light, not spooky sounds in the dark.