Franchise Opportunities: Risks and Rewards

Franchise Opportunities: Risks and RewardsNow that you're ready to own your own business, a franchise opportunity may be the perfect opportunity for you. But like making any major decision, you should first be sure you have done your due diligence. So, before you sign on the dotted line, let's look at the pros and cons of owning a franchise.

Owning a franchise vs. starting from scratch.

A franchise is a business in which you pay a franchisor for the right to use the company name, trademark, brand and system to operate your business. Ideally, you're buying an established business operating under an established brand with an established reputation. In most cases, the franchisor will stipulate the products, equipment and operating system you must use and offer ongoing support from marketing to training for which you pay a monthly royalty fee, which will be either a flat fee or a percentage of your profits. On the other hand, when you start a business from scratch, you are responsible for everything ? from the products or services you sell to devising your operating system and creating the marketing plan and materials needed to build your brand. Besides the cost, if you've never done it before, you have the added risk of making costly mistakes. As a stand-alone business, you're on your own. As a franchisee, when you open your doors, you are under the umbrella of an already established brand.

All franchise opportunities are not created equal.

Like many things in life, when buying a franchise, you often get what you pay for. Franchise opportunities with low investment costs and royalty fees are usually either minimal in terms of support or so new they don't offer a ready customer base. Franchises of more established brands will cost you more, but provide more of what you need to succeed. It's important to take these factors into consideration when deciding what kind of franchise is right for you.

The advantages of owning a franchise.

Assuming you decide to go with a well-established franchise opportunity, such as Primrose Schools or Auntie Anne's, you have the big advantage of buying a business that is already proven to be a successful concept. Since the franchise company's success depends on your success, you can expect the franchisor to provide some or all of the following:
  • An established brand and reputation
  • Products and services customers want
  • A proven operating system
  • Marketing support
  • Ongoing training
  • Back-office support, such as bookkeeping and administrative assistance
  • Call-center support where applicable

Of course, you pay for all of this through your monthly royalty fee, but can you imagine what it would cost you to create all of this on your own?

The disadvantages of owning a franchise.

If you're a free spirit or a rugged individualist, certain aspects of a franchise might feel like disadvantages to you. In return for greater security, you will have less autonomy in terms of the products and services you offer, how you price them and how you operate. As a franchisee, you agree to follow a set operating system. The next time you visit a Moe's Southwest Grill, for example, notice how cheerfully every employee greets you with a robust "Welcome to Moe's!" Moe's obviously has a very consistent ongoing training program. If you prefer doing things your way, you may feel stifled by such a rigorous system.

Franchises are not risk-free.

Though your chances of success with a franchise are enhanced by the fact that the franchisor already knows what it takes to succeed, some risks do exist.
  • Your franchisor may go out of business, causing you to do so as well.
  • Your franchisor may not deliver all the benefits and support you expect.
  • If your business depends on your franchisor for product, an undependable supply can be disruptive.

How to minimize your risks.

You can minimize your risks by researching the franchise. Search news releases. Ask for company references. Talk to existing franchisees. You will also have legal protection provided by the UFOC (Uniform Franchise Offering Circular), a required legal document based on federal and state regulations for disclosure of info such as the company history and management, problems such as litigation or bankruptcies, all fees and costs, all rules and restrictions related to ongoing business operation and the audited financial statements of the company.

Be sure your personality and lifestyle suit business ownership.

Before you start any business, franchise or otherwise, realize that your success depends in part on how suited your personality and lifestyle are to business ownership. Specifically:
  • As the owner of any business, you need to be skilled at managing people. If you've never managed people before, how comfortable do you think you will be giving directions, doing performance reviews and hiring and firing?
  • How well do you handle pressure? The long hours of owning a business combined with financial and staff issues can be more stress than some people can live with.
  • How good are you at selling? As a franchise owner, you may need to do face-to-face selling on a regular basis. In a small operation, all of your sales could depend on you.
  • How adequate are your financial reserves? If you don't have enough to pay your personal and business expenses before your business starts to be profitable, you may find yourself in a no-win situation.

As a franchisee, you're never alone.

If you are willing to learn and ask for help when you need it, you will increase your chances of success exponentially.
Despite the risks, a franchise offers one advantage that nothing else can match. Behind you on a daily basis are the franchisor and your fellow franchisees.

What's next?

If you feel that a franchise opportunity is right for you, decide which kind of franchise is right for you - a restaurant, advertising service, a home-based business, or perhaps fitness? Then explore your options within your chosen categories. If you do your due diligence, you'll be rewarded with a whole new world of opportunity.