If you are looking to start a new business, you may be pondering whether to start fresh, or look for a chance to take over an existing operation. There are a number of reasons why taking the reins of a previously existing business may be the best option.
But what about buying a franchise?
Just like buying an established business, a franchise offers the benefit of jumping into a successful business model already in motion, along with a few disadvantages that come with branding standards and contractual obligations.
If you’re thinking about buying a franchise, be sure you understand what you’re getting yourself into. To help decide whether a franchise is for you, consider the pros and cons.
In the end, you will probably find that franchises are, in fact, a smart investment.
Pros: No-Fuss Funding, Established Rules, Brand Recognition
Buying into a franchise will have many of the same benefits as buying an established business, but with the bonus of easier funding and bigger marketing perks.
Franchises offer some impressive benefits. Here are some of the highlights:
- Training assistance: Resources such as comprehensive training and support are a major part of what makes a franchise successful
- Brand recognition: Franchises come with identifiable brand names. Positive brand association and recognition are indispensable commodities, and a huge advantage when it comes to promotion, marketing, advertising, and SEO
- Investors love franchises:Although many aspiring entrepreneurs struggle to secure capital to launch a business, lenders see franchises as lower risks and are more open to initial investments
- Faster ROI: A built-in customer base that knows what to expect means a quicker return on investment (ROI)
- Legal help: Parent companies already know state and federal regulations and are there to help you comply with laws and handle legal proceedings
Cons: Costs, Controls, and Contracts
Although buying a franchise usually comes with easy name recognition and quick ROI, it also can have some drawbacks, especially when it comes to agreements and controls.
Owning a franchise is not without some cons, so make sure you are aware of their defined costs, controls, and contractual obligations.
First, in exchange for the right to benefit from the franchisor’s brand and assistance, you may have to shell out some or all of the following:
- An initial franchise fee: This fee can range from $10,000 to $200,000 and be non-refundable
- Additional costs: Renting fees, equipment fees, initial inventory, fees for operating licenses and insurance, or even a “grand opening” fee for promotion can add up
- Royalty payments: You may have to pay royalties for the duration of your franchise agreement even if you decide to terminate your franchisee agreement early
Another “con” to consider are the controls that may be set that can be restrictive.
A franchisor may want control over such decisions as:
- Design or appearance
- Goods and services
- Methods of operation
- Site approval
- Operations (hours, signage, uniforms, etc.)
Finally, it’s important to note that you can lose the right to your franchise if you don’t comply with the contract. If your franchise is terminated, you’re likely to lose your entire investment.
A franchisor can end your franchise agreement for a variety of reasons, including:
- Failure to pay royalties or abide by performance standards
- Declining to renew or renewing with different terms and conditions as your original contract
And the Winner is…
Buying a franchise will take an effort and careful consideration, just like any other business purchase.
When it comes to costs and contractual obligations, be cautious but optimistic.
If you choose to buy a franchise, the pros outweigh the cons and could save time and money overall due to brand recognition, quicker funding, and built-in supports.
Need to find one such business broker? That’s where we come in. At Michigan Business Broker, we have the experience and skills to make sure you have everything you need to succeed as a business buyer. Together, we can find the perfect fit for what you want and get your business up and running.
Call us at (248) 220-3274 or look at the business listings we currently have on hand to see what might be a fit for you.