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Is Buying a Franchise a Good Idea for Entrepreneurs?

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StrategyDriven Entrepreneurship Article | Is Buying a Franchise a Good Idea for Entrepreneurs?You’re an entrepreneur. You always have been, and you always will be. But you are also interested in starting a business with some built-in brand recognition and stability, and you could benefit from the advice of someone who has been there before. So, should you consider a franchise?

Franchise ownership is unique in that it affords the opportunity to own your own business while benefiting from the franchisor’s history, structure and support. You are on your own – an entrepreneur in every sense of the word – but you also have a solid foundation upon which to build. However, while buying a franchise can afford several benefits, it entails unique risks as well, and if your franchise is unsuccessful, you could lose far more than if you had started a business on your own.

Key Aspects of the Franchise Relationship for Entrepreneurs

If you are an entrepreneur and you are considering a franchise as an alternative to starting a business from scratch, here are three key aspects of the franchise relationship to consider:

  • As a franchisee, you own your own business. You are responsible for hiring your own employees, and you are responsible for your own success.
  • While you own your own business, you must operate within the confines of the franchisor’s model. Although this promotes brand uniformity, it can also have undesirable consequences in some cases.
  • As a franchisee, you can rely on the franchisor’s support – to a point. Your franchisor will only provide so much guidance, and some are much better at supporting their franchisees than others.

5 Risks to Consider Before Buying a Franchise

Along with these key aspects of the franchise relationship, there are some important risks to consider as well. These risks include:

  1. Initial Investment: Since you will need to pay an initial franchise fee in addition to your other startup costs, the initial investment for a franchise can be much greater than that for an independent business.
  2. Royalty Fees: Your royalty fees (and advertising fund contributions) will take a chunk out of your monthly revenue, and if your franchise relationship ends prematurely, you could be on the hook for “lost future royalties.”
  3. Unanticipated Costs: Franchisors regularly make updates and modifications to their system standards. If your franchisor makes any updates or modifications, you will be required to comply at your expense—even if this means taking on more business debt.
  4. Termination: Your franchisor will have the contractual right to terminate your franchise for various reasons. If you lose your franchise, you will lose your investment, and you will likely be subject to a post-termination non-compete and other restrictive covenants.
  5. Non-Renewal: While your franchise agreement should include provisions for renewal, the franchisees’ right to renew is generally subject to the franchisor’s approval. As a result, there is no guarantee that you will be able to renew when your initial term expires.

Ultimately, whether it makes sense for you to pursue a franchise depends on your unique background, skills, risk tolerance and financing opportunities. If you are interested in a franchise, you should consult with an experienced professional who can help you make an informed decision.

About the Author

Jeffrey Goldstein is a franchise lawyer and the founder of Goldstein Law Firm. He has been exclusively representing franchisees and dealers for over 30 years. Mr. Goldstein represents prospective, active and terminated franchisees nationwide.

The Types of Business Model You Might Want to Consider for Your First Company

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StrategyDriven Starting Your Business Article |Business Model|The Types of Business Model You Might Want to Consider for Your First CompanyThere are many decisions that need to be made when you’re looking to go into business for the first time. If you want to find lasting success, it’s important to get the fundamental decisions right. Among these is the question of what kind of business are you actually going to operate in terms of its business structure and its function and purpose within your chosen industry. We’re going to explore some of the options today, so read on to find out more.

Manufacturer

First of all, you might want to consider operating as a manufacturer within a particular niche. The manufacturing of supplies, products, parts and plenty of other things is always important and always will be. Manufacturers are relied upon by lots of different businesses operating within many fields and sectors. The startup costs can be high, but the profit margins can be strong too with the right setup and approach.

Distributor

Logistics and distribution has long played a vital role in the functioning of modern economies, and that’s truer now than ever before. Getting products and supplies to where they need to be in a timely manner is important, and any holdups in distribution can have knock-on effects for all kinds of other businesses too. That’s not something anyone wants to be dealing with, and it’s why reliable distributors matter.

A Franchise

If you’re looking to start a business that’s going to be less challenging to startup and that comes with a ready made idea, it makes sense to consider a franchise model. You can start a tax preparation business, a fast food chain and pretty much anything in between with the use of a franchise model. It definitely takes some of the hard work out of getting your very first business off the ground.

Retailer

Selling directly to the public is one common way to form the premise of your business. Retail companies can also focus on B2B sales within a particular business niche however, so that’s something that you might want to explore too. Succeeding with a retail business means having good sales people and offering strong customer service, as well as an ability to deal with all kinds of problems as they arise.

Ecommerce

If you want to get into sales but you want your new business to be online-based, it makes sense to consider the ever-expanding option of ecommerce. Of course, as we’re all buying online more than ever today, ecommerce is bigger than it ever has been, and there are certainly opportunities out there for you to take advantage of if you want to. It’s definitely a business model worth exploring if you want to keep startup costs low.

Each of the options we’ve discussed here is worth exploring because each business model we’ve mentioned is important and matters in its own right; there’s no doubting that. But what’s right for you will depend on where your skills lie and what you want your business to be, so give this some thought.

How to Decide if a Franchise is Right for You

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Many entrepreneurs wish to start a business based on an idea they have that they believe fills a gap in the market – or creates a new market. However, in many cases, you might wish to start a business but lack a viable opportunity in your location. This is where franchises come in. The basic idea is simple enough; you pay an established company for the right to use their business model and brand and run your own business under their umbrella. Some of the biggest commercial names run on this model, but how do you know if this would be a good fit for you?

Advantages

The main advantage of a franchise is that you don’t need to establish your business in a competitive marketplace. One of the main strategies of a new business will be to run effective marketing campaigns, which can be time-consuming, costly and a lot of work. With a franchise, you have that brand awareness in place already, and the marketing burden is largely taken off your shoulders. There is still a requirement for a degree in marketing, depending on the contract you sign, in which case you could look at social media marketing for franchises for example. The other key advantage is that the business model, including supply chain, IT systems, and personnel management is already in place, saving a huge amount of work compared to starting a business from scratch.

Disadvantages

The first thing that might spring to mind is the initial investment required for a franchise. This can be a sizeable sum for a major chain, and you will need to have a sound source of funding to be able to take on a franchise. However, before you dismiss the idea on these grounds, consider how much you would need to invest as an individual if you were starting from scratch. Factor in the costs of running marketing campaigns to the set-up costs and you may find that this puts the franchise cost into perspective.

One main issue is not so much the finance, because to start a business you will need investment anyway; rather it is your perception of the loss of autonomy. You will be bound by your contract to operate within the company regulations, normally with very little freedom to go your own way. Franchisors want their customers to be essentially unaware that the branch they are in is a franchise, so if you’re in an establishment in Delaware, it will be exactly the same as the one in Richmond, or Boulder. If you would find it hard to function with this lack of control, then franchising is probably not your best option. If, however, it is the challenge of being productive and profitable that is your passion, you could find franchising a perfect fit.

When considering the pros and cons of franchise opportunities, remember that with so many potential franchises to evaluate, there will be corresponding variations in the degree of control you have, so there could well be a business model out there that fits you. Read more on how a tree service franchise opportunity could be the business you are looking for.