Many prominent businesses started with an idea that eventually became a thriving enterprise with multiple locations. However, taking that initial risk and build from the ground up is also fraught with pitfalls. After countless “trials” and errors” in their operations, a vast majority of enterprises do not survive while a select few become giants in their industries.
Franchising is an option that allows entrepreneurs to purchase a business that is already up, running, and successful. As with any business pursuit, pros and cons exist.
Pros
- Proven concept and success – An existing model that is profitable is an attractive option for entrepreneurs. Access to financial data combined with insight from fellow franchisees could provide an easier path to success.
- Brand recognition – Consumers are usually creatures of habit. The trust placed in a business builds customer loyalty. Replicating that model brings in a built-in customer base, reducing the need to “get the word out.”
- Ongoing support – Franchisees and their franchisors have the same goals, wanting the enterprise to succeed. Access to support in the form of education, training, lease negotiations, and other amenities is usually one of the many perks that come with being a franchisee.
Cons
- Franchise fees and royalties – Buying a system developed by a company eliminates many of the steps required in opening a business. However, a sizable upfront fee in the five figures or more is standard. In addition, royalties based on revenues that range from four to twelve percent or more must be paid.
- Limited (if any) creative control – The success of a franchise hinges on adhering to the existing system. Going “off script” and changing product offerings or “going rogue” to launch a custom advertising campaign can damage the relationship with the franchisor, perhaps irreparably.
- Bad press and damage control – Reputations of the most successful franchises can be irreparably damaged when bad press goes viral. Overnight, a franchisee doing the right thing and who had nothing to do with a food poisoning outbreak or labor disputes finds customers searching for other options, resulting in revenues dropping.
*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.