Opening a Franchise - What you Need to Know
Risks of Franchise Ownership
Working for yourself has a lot of appeal, and using a safe, proven investment with a major name attached to it seems like a good way to go about it. But franchises have many cons for an entrepreneur, and it’s important to weigh them carefully before making a decision on your financial future.
The first big negative any potential franchisee is going to notice is the huge list of rules. Franchises have rules for every aspect of running your store. They must be conformed to with no questions asked. Everything from the look of the store, to the price of goods, and even what goods you can sell have very specific guidelines. This restricts an owner from responding to regional trends and staying ahead of competitors if the franchise is slow to act.
Non Refundable Franchise Fees
Franchise fees are often non-refundable. Starting the process to become a franchise owner can cost between 25k and 50k, and that is just to get started. If the client backs out later in the process for any reason, they are forfeiting that money. This forces clients into a situation where they are less likely to respond to new information or changes in finances during the long opening process. No one wants to lose such a large investment with nothing to show for it. Additionally, most major franchises require their franchisees to already have significant personal financial assets, and are unlikely to consider anyone with credit blemishes. On top of that, the initial opening costs can be rather high. Franchisees have no control over what type of equipment they buy, and are often stuck buying top of the line to conform to franchise standards. Similarly, they do not get to pick suppliers of their product or anything else required for daily operation. Everything from the food all the way down to the spoons will be handpicked by the franchise.
Franchises also require an annual percentage of the gross sales, not net dollars. This causes franchisees to send money to the franchisor instead of investing money back into the business. These fees last as long as the store is open. Other ongoing fees include training, advertising pools, and equipment upgrades. Most franchisors will not help you get financing, because any lending issues could lead to lawsuits. The same is true with the real estate location department. Therefore, franchises will not directly help but instead point you to a few preferred lenders or give recommendations instead of concrete answers. Finding a suitable location can often be difficult, and operating territories can sometimes be very small. A lot of major franchises are already in saturated markets and your store could end up stealing business from the franchise or you could end up with a new one coming to town and eating your business. The lack of control you have over the business can also be a killer. If the franchise itself screws up you can quickly lose profits. If another franchisee has workers that do something inappropriate that gets into the public consciousness, you could catch a lot of blowback at your completely unrelated location. In this way, the branding can be a blessing and a curse.
Restrictive Franchise Contracts
Finally, most franchise contracts are long (10 years) and you will be unable/monetarily discouraged from selling during that period. If you want out after the contract is up, you are likely to be subject to hefty termination fees. Transferring to a new owner will also cost you. Similarly, if you like the store and want to renew, fees will be associated with that transaction as well, sometimes the same type of hefty fees you paid for the original contract. And the franchisor can take the store for a myriad of reasons. The lack of control is really the biggest negative that comes with the branding and respect of a franchise. Franchisees need to do a lot of homework, contacting other franchisees and doing as much research as possible on their company of choice.
Opening a TurnKey Business Instead
If you are interested in becoming a small business owner and want to avoid the potential pitfalls of a Franchise, a Turnkey Business is the right choice for you.
- No Franchise Fees
- No contractural obligations
- The freedom to name your own store
- The freedom to sell any type of merchandise (landlords discretion)
- The ability to order merchandise from any supplier