So you want to own your own business without all the risk of entrepreneurship? Chances are you’ve looked into a franchise or two. In this article I’m going to discuss why you might want to own a franchise and the benefits they offer. I’m also going to discuss why you’d be better off not owning one, in my opinion.
The Benefits of Owning a Franchise
- A proven formula
- Built-in marketing
- Easy financing
- Training and assistance
Those are some tempting benefits. Let’s look at each one.
Franchises have a proven formula. This is supposed to take the risk out of entrepreneurship. The idea is that you own a business that has already proven itself to work and be profitable.
Along with the proven formula is the marketing plan that comes with a franchise. When you buy a franchise you are buying into an existing brand that consumers are familiar with. The franchise will handle advertising and provide you with marketing materials for your particular location. This is important because marketing is one of the most vital parts to any business.
Franchises are typically much easier to finance than startups. The terms for what is required, financially, of a franchisee are usually straightforward. They want to see that you have a certain net worth and a certain amount of liquid capital to make sure you can handle the cost of doing business. Not only will banks finance a franchise easier than your own business, but many franchises offer their own program to help you finance your investment.
That all sounds nice, sure, but let me explain why I think franchises are for suckers.
The Disadvantages of Owning a Franchise
- Initial cost
- Franchise fees
- No control of brand or products
- Most require owner-managers
- Your franchise agreement can be terminated
Owning a franchise is very expensive upfront. Unlike your own business, you have to build your location to the standards of a business that has been operating for years.
This isn’t always a bad thing. However, in many scenarios a business could be built up slowly with significantly lower startup costs. This one comes down to the individual business owner and business type.
You also have the ongoing costs of royalty fees or franchise fees, whatever they want to call it.
Getting access to that brand, training and marketing strategy comes at a cost. Obviously they should be charging you for this, but let me explain why this is a disadvantage.
Eventually you will learn the ins and outs of that business and you’ll get to the point that you don’t need their help anymore. In fact, in many cases, you might actually be able to run their franchise better than they do. So why would you want to keep paying them at that point?
For the rest of your life as a franchise owner you will forever be paying for the initial head-start they gave you. Even if you open multiple franchises that are more profitable than theirs, you will forever have that cost eating away at your profits.
You will forever be paying to use a brand that you cannot control. As a franchise owner you are selling their products and promoting their brand. The identity of your franchise is formed by the entire company.
The franchise owners are doing all the hard work to build up a brand that they don’t even own. If you own a Subway and you have built up a loyal customer base to your location, it helps Subway more than you. What if you had put all that work into your own sandwich shop and built up loyal fans to YOUR brand?
Not only are you doing all the hard work and not getting the credit, but you will suffer the blame when the franchise corporation screws up. Political issues, big lawsuits against different locations, bad marketing strategies – any of these things could happen at any given time at no fault to you. You will suffer though, because you are guilty by association.
My least favorite quality of franchises is that most require owner-managers. The alternative is called absentee ownership, where you are not required to be at the location daily for a set amount of time and can hire someone to manage it for you. Time is the most valuable currency and you are required to pay too much time as an owner-manager.
If they force you to manage the franchise, they are just tricking you into being their employee that pays his/her own way. Imagine if you had a profitable business and you wanted to expand and hire someone to manage a second location.
Wouldn’t it be nice to find someone dumb enough to use their own money to build that new location for you, to the exact specifications that you require and also fill the manager role?
Let’s say things aren’t working out and you can’t pay your franchise fees or a personal tragedy happens that effects your net worth – the franchisor can terminate your agreement. That’s way worse than being fired!
Ideal Scenario as Franchisee
I don’t think franchises are all bad. I’m just saying that if you think owning a franchise makes you an entrepreneur than you are the type of sucker that franchisors prey on.
There is a scenario where I think owning franchises is a good idea, let me explain.
You must meet these conditions for my ideal scenario:
- Can afford multiple franchises
- Don’t require income from franchises to be primary source
- You are investing in a high quality franchise that allows absentee ownership
- You have an investor mindset, not a manager
Here’s how I would (and might do someday) approach owning a franchise. I would only do it if I had enough money to invest in several franchises upfront. Most people can’t do this, so you have some room for negotiation on terms and fees with the franchisor.
Like any investment there is going to be risk and you need to be able to afford that risk. I would never, ever, advocate going “all in” financially into someone else’s business unless you have some level of executive decision or control.
I look at franchises as an investment that provides supplemental income to what you already do. Franchises are very expensive and you need to be able to afford for them to not make much money at first, if necessary.
Most businesses fail due to lack of funding, in all industries.
I would be looking for a company that is well established, but still has plenty of room for growth. You don’t want to be that person who got in too late when the market is already saturated with those franchises.
They would need to allow absentee ownership and would also have to be fair with their terms and requirements.
Then I would hire people to manage the franchises I owned. There’s a reason they call entrepreneurs “business owners” and not “business managers.” My role would be to oversee the operation and check in with the managers to make sure they were carrying out the “big picture” plan at their level.
After a year or 2 (however long it takes) when I had a great set of managers running profitable locations I would promote one of those managers to be the district manager. That person would replace my role overseeing the entire operation. At that point I could just sit back and let my assets bring me income.
Be an owner, not a manager.
Now hiring managers instead of managing the locations myself would cost much more. However, if I’ve done my due diligence, I’ve found plenty of cases where these franchises are profitable with absentee ownership. That’s why I require that the franchise income is not my primary income source. I would be making less money on each location than an owner-manager, but overall I would be making more money for less of my time.
Why You Should Create a Franchise
Starting a franchise is an excellent way to grow your business. Once you’ve got a proven formula and several locations to back it, you don’t have to worry about all the trouble of building more and hiring all those people. You can find someone else to do that for you and pay for it as well.
I remember when I was a kid and a substitute teacher didn’t know what to do with us, so she put on this documentary about Ray Kroc. The majority of the class fell asleep – but I was taking notes.
For those who don’t know, here’s a brief background on Ray Kroc
Kroc was a successful salesman for several companies in his early adulthood. He then got exclusive rights to sell a milkshake machine, the best of its kind. The industry started to slump and business was slowing. Then an order for 8 machines for a family owned restaurant in California caught Kroc’s attention, owned by the McDonald brothers. He gained the exclusive rights to sell McDonalds franchises and eventually bought the entire company. The rest is history.
I’ll never forget a quote I heard from Ray Kroc in that documentary. Kroc was talking to some students and asked them what business they thought he was in. Of course, they guessed that he was in the business of selling burgers.
Kroc laughed and responded, “Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.”
You’ve got to look at the big picture. The franchisor is always going to be winning. Do you want to be at the top – or do you want to always be playing ketchup? (Couldn’t help myself with that one)
I’d rather invest my time in businesses that I create myself, not someone else’s. Just my personal opinion. I can see what qualities make a franchise attractive, but for the most part I think a talented person would be better off starting their own company. Being a franchise owner is usually more similar to being an employee than a business owner.
What’s your take on franchises? I’d love to hear from people who own (or have owned) a franchise, let me know in the comments.
Until Next Time,
What do you think? Do you agree, disagree or have any thoughts to add? Let me know in the comments below.
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