The Advantages and Disadvantages of Owning a Franchise

It is not by accident that the majority of US small businesses today are franchise operations. Many people who opt to start their own business opt for the security and proven track record of owning a franchise that is based on an existing business model that has worked successfully for many other people. Today, franchises in the US employ over 10 million people and account for nearly ten percent of the US gross domestic product. However, for those who are trying to decide whether to buy a franchise or not, there are advantages and disadvantages to be considered.

Some of the most popular franchises today in the US include McDonald’s, Jiffy Lube, KFC, Subway, Holiday Inn, and countless others. A franchise agreement is where a host company, or franchisor, sells the rights to use a business name and sell a particular product to consumers within a specified sales region. The advantages for many business owners to purchasing a franchise involve less risk and management and marketing assistance from the franchisor. In addition, the franchisee can own a business that has a nationally recognized brand name with a good reputation among consumers. Also, many times franchises who are new to owning and managing a business can receive financial advice and assistance from the franchisor as well.

Often, new business owners find that financial record keeping is one of the most difficult tasks to master when starting a new business. In this instance, franchisors can provide advice and assistance to new franchisees on how to keep up with these tasks. In addition, some franchisors also provide financial assistance, such as payment plans and financing options for new franchisees, which can help to minimize the burden associated with high start up costs. In essence, owning a franchise is kind of like participating in a mentorship, where experienced leaders within the franchisor’s operation assist new franchisees in owning and running their stores.

The downsides, however, to owning a franchise are what hold many people back from buying one of these kinds of operations. While franchises historically have a lower failure rate than other types of operations, the cost of purchasing a franchise is often quite high. In addition, franchisees have to share profits with the franchise company, which can be a deterrent for many who would rather take a chance on achieving larger results with their own ideas. Management regulations are often seen as an impediment for some franchise owners as well. Often, disputes among shared management can lead to a great deal of conflict, and imposed regulations can be difficult to adhere to in some regions. The franchisor can also dictate to whom you can sell your franchise, if you ever desire to leave the business.

Also, with some smaller franchises, there is an increased risk of coattail effects. This means that if a number of other franchises fail, the effect can bring down your franchise operation as well. While some opt for purchasing franchise operations because of the reduced risk and the fact that they believe many of these existing franchise operations to be stable and profitable, it is important to keep in mind that there are still a number of fraudulent franchise companies out there, so it is important to do the necessary research into a specific company before investing a large sum of cash into a franchise operation.