Investing In a Franchise: Is It Smart?

The following is a guest post about investing in a franchise. If interested in submitting a guest post, please read my guest post policy and then contact me.

Is franchising a pizza parlor, a laundry service or any available franchise smart? The honest answer to that question is it depends. Owning a franchise is a dream job for some, but for others it would be absolutely awful. It’s really contingent on what you want out of your career and what you are willing to put into it. And while franchising definitely has its up sides, like everything else, it also has its downs. So what can one expect as a franchisee?

The Downs

High start-up costs. Franchises vary greatly as far as capital costs, but plan on spending anywhere from hundreds of thousands to millions of dollars. Usually this spells a large amount of debt for a franchisee. Whether you’ll make enough to pay it back, well, only time will tell.

Royalty payments. You must pay a percentage of all your earnings to the franchise annually. The percentage varies by franchise.

Inflated supply pricing. Many franchises require franchisees to order supplies from certain suppliers. Even if you can get the same supplies cheaper elsewhere.

Limited freedom. You don’t have ultimate reign in your franchise. Part of franchising is maintaining consistency within the brand. You have to build your restaurant according to the franchise’s requirements, you have to sell what they tell you to sell, your employees have to wear what they tell them to wear, etc. You can’t buy a KFC and decide you want the color scheme to be blue and orange, for example.

Unfair termination. Some franchisors are very hard on their franchisees. If you were a few days late on a royalty payment, for example, they would be within their bounds to fire you.

Lack of territorial exclusivity. While some franchises protect customer territory by not allowing another store to be built in the immediate area, not all franchises do. Some allow territorial battles between their stores. It is possible for the same franchise to open across the street from you, cutting your customer base in half.

Competition restrictions on future business endeavors. Let’s say you own a Jamba Juice for six years, and at the end of those six years you think you can make a better fruit smoothie than they can. Well, when you bought the franchise, they made you agree to never start a business that sells products in direct competition with Jamba Juice. So it’s no use selling your franchise and opening your own, because you would be putting yourself in serious risk of a lawsuit.

Limited legal options. Franchises request you to sign away many of your legal rights when you agree to become a franchisee, so there isn’t much you can do if you feel you’ve been wronged by the company.

It’s a big risk. Franchising may be less risky than starting your own business, but it is still a huge risk and you want to make the decision with extreme care.

The Ups

You get to work for yourself (sort of). You are the boss of your franchise unit(s). You get to hire and fire, manage inventory, ordering and buying, payroll, and maintenance—all that good stuff. But there’s a catch. Remember the limited freedom we discussed in ‘The Downs’ section? Exactly.

Banks are more willing to finance a franchise. Franchises pose less of a lending risk than self-made businesses.

You are more likely to succeed as a business owner. Franchise businesses are sort of a proven success. That’s why they have a franchise (but don’t go thinking your franchise is immune to closing its doors. Anything can happen for a whole host of reasons). When compared to opening your own business, franchisees are almost always better off.

Instant credibility. Franchises are businesses the public recognize and identify with. You don’t have to start at the bottom. You will hit the ground running with a brand your customers already trust. You can pretty well plan on customers the minute you open yours doors.

Established business model. You don’t have to figure out the ‘right’ way to run a business. You don’t even have to go to business school (yes, I said it). As long as you have a little business know-how, you can own a successful franchise simply by using the business model the company provides for you.

Support network. You have a huge support network among hundreds or even thousands of other franchisees just like you. Not only that, but the franchise has a plethora of resources available to help you with any question or problem you may have.

Training. The franchise will provide all training for you—hours upon hours. They will help you immensely when you are first starting out, but it won’t stop there. They will continue to provide periodic training as new business practices are implemented.

Marketing is a breeze (usually). Not all franchises are the same (some put marketing in the hands of their franchisees), but most take care of all the advertising for you. All you have to do is run a good, honest business to keep those customers coming back for more.

Owning multiple franchises is usually very lucrative. Owning one franchise brings in plenty of money to live on. Own two, three, four, or more of the same franchise and you will start to make some real and serious cash.

Exclusive territory (sometimes). For many franchises, when one store is opened in an area, that area becomes out-of-bounds for any other businesses of the same franchise to open nearby.

Build job equity. When you reach retirement you can sell your franchise to a new owner and potentially make a hefty profit.

Like everything in life, franchising has its ups and downs. However, just a piece of advice. If you play it smart, from choosing a viable franchise, to using your financial investment wisely, to running your business like a well-oiled machine, it can be a very lucrative business opportunity. All you need is a little business experience, plenty of smarts, and a lot of dedication to make owning your own franchise a success. Do your research. There are plenty of small business and big business opportunities out there to try.

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