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Franchises – Pros and Cons for the Entrepreneur

April 12th, 2007 by rosie · 2 Comments


For some, the idea of going at it alone in the business world is filled with too many risks and unknowns. Yet, they still desire to be their own boss. Is there a way to be an entrepreneur with a ready-made business that is guaranteed to be successful? Not exactly, but there is the option of buying a franchise, which may come close.

So what exactly are the pros and cons of owning a franchise? According to the International Franchise Association, “Industry analysts estimate that franchising employs more than 8 million people, a new franchise outlet opens somewhere in the U.S. every 8 minutes, and approximately one out of every 12 retail business establishments is a franchised business.” With those statistics, franchising has to be a great deal, right? Not so fast; it’s not all positive. There are some negatives that need to be considered before jumping on the franchise bandwagon.

First, the negatives:

1. Higher start-up costs

If you have looked into franchises, then you already know some carry a pretty hefty price tag. For example, buying a Subway franchise, ranked #1 in Entrepreneur’s Franchise 500 for 2007, can cost anywhere between $74,9000-$222,800. That’s a lot of money, and it puts owning a brand name franchise out of reach for a majority of people. What you are paying for, essentially, is name recognition and the “system.”

2. Royalty Fees

Not only do you fork out some dough during the initial purchase, but then you have to pay on-going royalty fees, usually ranging from 3-8 percent of the profits. This is to cover support for operations and advertising.

3. No True Independence

A person who buys into a franchise does so with a binding contract. And a franchisee follows set guidelines for operations and must publish his financial information to the franchisers. There are also usually geographic restrictions of where he can operate.

4. A franchiser’s problems become the franchisee’s problems

Just about every Wendy’s franchise suffered financially when there was a (false) claim that a finger was found in a customer’s chili.

Those may be serious issues and may seem daunting, but franchises also offer many benefits. And that’s why they are popular and can be very successful.

Now to the Positives:

1. Turnkey System

A franchise system is a proven system for business operations and making a profit. The equations have been worked out and should work for even those who may not have a strong sales and marketing background. A franchisee receives an operations manual, standardized products and systems, and a standardized accounting and financial system. New franchisees can avoid a lot of the mistakes start-up entrepreneurs typically make because the franchise company has perfected daily operations through trial and error. With a franchise, risk is greatly reduced.

2. Support

A small business owner typically lacks a support team; not so with franchises. Franchises usually offer most of all of the following: training, supervision, consulting, site selection guidance, sales and marketing assistance, and financial assistance.

3. Power in Numbers

A franchisee will gain from large scale buying of materials, supplies and services, such as advertising, as well as in negotiating for locations and lease terms. A small business owner will have less bargaining power than a large franchise company.

4. Brand Recognition

Most major franchises have adequate national and local advertising programs. Customer acquisition may come much easier. Recruiting staff may be easier because of brand recognition. Brand recognition is a very strong benefit of a franchise.

Do the positives outweigh the negatives, or vice versa? That all depends on the candidate. Obviously, franchises work well for many people. Many fortunes have been built though franchises. But there are some, those who are especially independent and could not happily operate under the strict operating requirements of a franchise, who would be better off pursuing their own path to true entrepreneurship.

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    2 Comments

    Comment by free ipod classic
    2008-01-01 23:04:13

    having a franchise is such a tossup. i remember reading somewhere that having a mcdonalds franchise is a license to print money. sure, that’s cool. but there are SO many rules that go along with it. same thing with starbucks. i LOVE starbucks. it’s crazy a subway franchise costs 75k minimum. where are you going to get that kind of scratch and THEN pay the money to run the business..crazy.

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    Comment by James
    2008-03-28 06:39:22

    Franchises pros and cons are dependent on the franchise buyer and provider.
    Being as a self Entrepreneur, you need to do well research on the local market and possibilities of the business in local market.
    If franchise owner take care about the basic steps while choosing a best franchise for being a Entrepreneur, it will lead the business of the way of success.

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