F ranchises play an important role in the American economy. According to the International Franchise Association1, there are over 760 thousand franchised businesses in the United States by January of 2018, as seen in the attached graph. Since the US economy recovered from the 2008 recession, the number of locations has grown steadily, with a total of 9% between Jan. 2013 and Jan. 2018; concurrently, we have also seen a 17% increase in jobs created.
According to a published article in CNBC2, the industry sectors with biggest growth in 2017 were:
- Personal Services
- Fast Food
- Sit-Down Restaurants
- Retail Services and Products
- Business Services
The Franchise is a system in which the investor, or the franchisee, pay fees and royalties to a central company (franchisor) in exchange for the right to use the company’s brand, sell their products and/or utilize their business format and commercial system.
What franchises have to offer to investors, regardless of their experience or background, is the capacity to possess and operate their own business with a level of guidance and support that increases the overall chances of success for the investor, particularly when investors are first time owners, or when they enter a new market or a new country.
Some of the advantages of a franchise are:
- Proven business system.
- Training and managerial Support.
- An established brand with established appeal.
- Standardized quality of goods and services.
- National advertising and marketing assistance programs.
- Proven commercial format, products and processes.
- Centralized purchasing power.
- Assistance in site selection and protected territory.
- Greater chance of success.
As with everything, there are also some disadvantages with franchises, such as:
- You will pay a franchise fee and then will continuously pay royalties, even when you’re not turning profits.
- You will have to maintain strict adherence to the conditions in your contract.
- You will be subject to restrictions on where you can purchase goods and what prices you will pay.
- You’ll have a limited product line.
- You will be subject to diverse conditions in your contract and for its renewal.
- It is not uncommon to find training programs that do not meet your expectations.
- For some of the larger franchises, you run the risk of market saturation.
- In general, you’ll have little freedom in the operation of your own business. Because of this, franchisees are sometimes referred as “happy prisoners”.
It’s also rather common to run into wrong beliefs about franchises. Some myths are:
- Franchises are more secure and do not fail: as true as it is that there’s a lower risk with franchises, it is also true that a certain percentage of franchised businesses close for financial issues.
- Franchises are a cheaper system to buy into: the lower risk seen in franchises is accounted for as the initial investment is higher than if you were to build a similar business independently. To get into a franchise, you’ll have to pay an initial franchise fee, pay for all preselected equipment and furniture, and install an identification system, that are usually of excellent quality yet more expensive than those used in independent businesses.
- The larger the franchise, the greater the chances for success: it is very common for bigger franchises that have a larger number of stores, to oversaturate the market, hence lowering profitability.
- I’ll begin following the franchise’s regulations verbatim, and then I’ll adjust as I grow: independence is very limited under this business system. Independent entrepreneurs create chaos under any franchised scheme; hence, contracts tend to be very rigid and are applied with an iron fist, sometimes resulting in being forced out.
- Franchises are basically “all the same”: each franchise has a personality, requirements, procedures, and unique cultures.
- As an owner, I won’t have to be at the front of the business: most franchises won’t allow for absentee owners; they’ll require business owners to be present in daily operations.
- Anyone can be successful under the franchise system: many franchises are not for everyone. Usually, an enterprising person, or a “free spirit”, will suffer under this system.
- The franchise will resolve any issue I have, that’s why I’m paying them: this system will help you establish the business, but they won’t run it for you. All business problems will have to be resolved by the business owner.
Other issues to consider before purchasing a business are:
- Investigate the market or area in which you’re considering opening the franchise, it’s growth, the intensity of competition by other concepts and by the same concept, the characteristics of the population of the area, if they adjust to the ideal clientele of the business concept you’re considering, etc.
- Consider all of your business options. In the US, there’s always more than one option when it comes to franchises in a particular business line. For example, if you’re considering a fast food service, there’s a multitude of options for that. Consider them all, or the ones you find the most attractive, of biggest growth, the ones not present in that market or have not saturated the market of your area.
- Obtain a copy of the document that details all of the conditions of every franchise that you’re considering, called a Franchise Disclosure Document (FDD) and go over them carefully.
- The FDD will give you access to current and out-of-business franchises. Contacting them will give you a great deal of information about the business and the relationship between the franchisor and franchisee.
- Interview the franchisor, using a good guide or questionnaires about the things you’ve learned in previous steps, about the FDD, contractual conditions, the opinions of current and previous franchisees, etc. Franchise contracts are long term contracts, usually of 10 years. This commitment contains very rigid conditions to meet.
- Once you’ve gone over all of this, make a decision. Take your time but be assertive. At the end of the day, it’s your money and your way of life that is in play here.
With our service of Guided Business Acquisition, we will guide you in the steps to take in your business decision, we will help you identify the key aspects to evaluate with each franchise, we will provide you guides on how to interview the current franchisees, the ones out-of-business, and the franchisor, so that you arrive to the end of the process with the necessary information to make the best decision.
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