As a business owner, deciding whether to buy a franchise is a big decision that requires careful consideration. Franchising can offer a "turnkey" operation with the benefits of an established brand and business model, but like any investment, it comes with its own set of challenges and risks. Whether you’re looking to expand your business portfolio or you’re new to entrepreneurship, buying a franchise might be a smart option—but it all depends on your goals, lifestyle, and future plans.
Let’s break down some general considerations, the pros and cons of buying a franchise, and how to approach the process, especially when it comes to reviewing crucial documents like the Franchise Disclosure Document (FDD).
What Is A Franchise?
A franchise is a business model where you, the franchisee, buy the right to operate a business using the franchisor’s brand, systems, and intellectual property. It’s an agreement that allows you to tap into an established business concept, often with significant marketing, operational, and logistical support from the franchisor.
When you buy into a franchise, you're typically given everything you need to start and run a business. You follow their proven systems, use their branded products or services, and are supported by their marketing efforts. In exchange, you pay an initial franchise fee, along with ongoing royalty payments and sometimes advertising fees.
The Pros Of Buying A Franchise
Proven Business Model: One of the biggest advantages of buying a franchise is that you are purchasing a proven business model. This means you're stepping into a business that has already been tested in the market, which reduces the inherent risk of starting from scratch. Most franchise systems have operational systems, marketing strategies, and customer retention techniques that are already in place, so you don’t need to reinvent the wheel.
Brand Recognition: Many franchises come with brand recognition, which can be incredibly valuable. Established brands like McDonald’s, Subway, or 7-Eleven have already built a customer base, so you benefit from their reputation, loyalty, and marketing efforts. This can lead to faster customer acquisition and a smoother startup process.
Turnkey Operations: A significant benefit of franchising is that it often provides a "turnkey" operation. This means you don’t have to spend years developing policies, procedures, and business strategies. The franchisor provides you with everything you need, from training programs to marketing materials, supply chain management, and even technology platforms. It’s designed to be a plug-and-play system, so you can focus on running the business rather than reinventing the wheel.
Support And Training: Franchisees receive substantial support from the franchisor. This often includes initial training, ongoing support, operational assistance, and marketing help. If you are new to the business, this can be invaluable in helping you avoid common pitfalls and run a more efficient operation.
Financing Assistance: Many franchisors have relationships with lenders or offer financing options to help you get started. This makes the process of securing funding easier compared to starting a business from scratch.
The Cons Of Buying A Franchise
Cost: Franchises typically require a substantial upfront investment, which can range from a few thousand to several million dollars, depending on the brand. In addition to the initial franchise fee, you’ll have ongoing royalty payments, which can range from 4% to 12% of your revenue. These costs can eat into your profits, and you must factor them into your financial planning.
Lack Of Flexibility: While franchising offers a proven system, it also means that you are tied to the franchisor’s rules and policies. You may not have the freedom to innovate or make changes to the way the business operates. This lack of flexibility can be a downside for entrepreneurs who value autonomy and want to run their business their own way.
Limited Control Over Branding: Since you are operating under the franchisor’s brand, you won’t have full control over how the brand is managed or marketed. If the franchisor makes changes that you don’t agree with, you may not have the power to change it. Additionally, your business’s reputation is tied to the overall performance of the brand, so if the brand suffers, so may your business.
Selling Challenges: While selling a franchise may seem like a simple option, it doesn’t always get the highest multiple. Franchisors typically have regulations that affect the resale of franchises. Most franchises will want to ensure that any future franchisees meet certain criteria, which can limit the potential pool of buyers. Additionally, franchise resale prices often don’t appreciate at the same rate as independent businesses because the business’s value is heavily tied to the franchise’s brand, and multiples don’t generally rise indefinitely. Franchisors prefer keeping multiples in check to ensure the brand remains accessible and stable for future franchisees.
Ongoing Fees: Franchisees are required to pay ongoing fees, including royalties and marketing fees. These fees can add up, eating into your profit margins. Even though you’re getting support from the franchisor, these fees can sometimes make it harder to scale quickly or achieve a high level of profitability, especially if you’re operating on slim margins.
The Franchise Disclosure Document (FDD)
Before purchasing a franchise, one of the most important steps is to carefully review the Franchise Disclosure Document (FDD). This legal document provides crucial information about the franchise, including the franchisor’s financials, fees, terms of the franchise agreement, and the history of any legal disputes.
The FDD will also outline your responsibilities as a franchisee and the franchisor’s obligations. It’s essential to have a legal expert or consultant who understands franchising thoroughly to help you review this document. Make sure you understand the terms of the agreement, including any restrictions, fees, and exit clauses, to ensure that you’re making a sound investment.
Owning Multiple Franchises
One potential way to increase your returns and boost the value of your business is by owning multiple franchises. In many cases, owning several franchise locations can result in a higher multiple when it comes time to sell, as franchisors value multi-unit operators. Owning multiple franchises can demonstrate your ability to scale and effectively manage larger operations, which can make your business more attractive to potential buyers.
Conclusion
Whether buying a franchise is the right decision for you as a business owner depends largely on your goals, lifestyle, and long-term plans. If you’re looking for a proven business model with established brand recognition, operational support, and a turnkey system, franchising can be a fantastic opportunity. However, if you value creative freedom, flexibility, and the ability to innovate without constraints, franchising may not be the right fit.
Make sure to carefully weigh the pros and cons and consult with franchise experts and legal advisors. Additionally, if you plan to sell the franchise in the future, keep in mind that selling a franchise doesn’t always yield the highest multiples, and owning multiple units might increase your chances of securing a higher return.
If you are considering exiting your business or selling a franchise in the future, be sure to reach out to Exit Stage Left Advisors, specialists in business selling and exit strategies, for expert advice and guidance on how to maximize your return.
