The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
Starting your own business is scary.
A lot of would-be entrepreneurs try to take some of the fright out of it by investing in a franchise operation. Franchise operations can improve the chances of business success, but they often do so at a high price. So, are franchise businesses worth the money?
It’s actually a mixed bag. You can easily make a six figure income from the better established franchises, such as McDonalds, Wendy’s and Chick-fil-A. But, franchise operations aren’t for everyone.
The Pros of Franchise Businesses
If you’re looking to start a new business, investing in a franchise is like going into business with a senior partner who knows the ropes, and has already developed a model for business success.
Some of the advantages that a franchise offers include:
Corporate marketing. This is the biggest, and perhaps most underrated, aspect of business success. Franchises often come complete with marketing packages, including advertising, that will keep customers coming in your door. You’ll have to pay to participate in that marketing, but the results will be pretty close to guaranteed.
Brand recognition. Brand recognition is the single biggest obstacle for every new business. You’re coming out on the street as the new guy on the block, and you need to develop a reputation it order to create a viable customer base. When you invest in a franchise, the brand recognition is already there. This enables you to have a customer base virtually from the get-go of your business.
Management template. With a franchise, there’s no guesswork when it comes the management. The franchise already has a management template in place, and all you need to do is go through the steps. There’s no need for trial by fire. That will save you both time and money.
Location, location, location. The more successful franchises have the location thing down to a science. They know exactly where to locate an operation for success.
Financing. Getting a bank loan for a business start-up is close to impossible. Large franchises typically offer financing packages that will remove the need to depend upon the banks.
So far, investing in a franchise sounds perfect. But read on.
The Cons of Franchise Businesses
Just as there are giant positives to investing in a franchise, there are negatives of equal proportion.
Upfront capital plus debt. It can be more expensive to invest in a franchise than to start a business from the ground up. This is because the franchise has a large dose of goodwill, as listed above. Your chances of succeeding with a franchise are far greater than if you start a brand-new business, but you’ll be paying a heavy financial price for those advantages. A McDonald’s franchise for example, can cost a total of $2.2 million, including $750,000 upfront.
You’re self-employed, but you’re really not. If you’re looking to be truly self-employed, investing in a franchise may not get you there. It’s something of a hybrid – from a standpoint of capital, you’re certainly self-employed. After all, it’s your money you’re putting into the franchise. But as far as running the day-to-day operations, your largely locked into the franchise management plan.
Our way or the highway. The larger and more successful franchises have very specific operating plans. If you can’t work within the prescribed framework, the franchise can be terminated. Franchises need to maintain companywide standards, so there’s very little room for individual creativity or expression.
Failure is not an option. Franchises don’t like failing operations. If your franchise is struggling to survive, your affiliation with the company could end in short order.
Are You Suited to Run a Franchise Business?
Apart from the pros and cons of franchise participation, you have to seriously consider whether or not you have the personal profile to make it in the franchise business. Not everyone can, and you have to be completely honest with yourself in determining whether or not you have what it takes to make a franchise work.
You must be entrepreneurial. Even though there is a lot of top-down control in franchises, you still need to be an entrepreneur at heart. That means you have to know how to run the place, how to deal with people, and how to manage scarce resources. If you’ve never been self-employed before, investing in a franchise could become a disaster.
You must have a sales persona. When you are running a franchise operation, you’re typically dealing heavily with the retail public. There is an element of sales involved in this, that includes at a minimum, a high level of comfort in dealing with people. If you prefer to work in a quiet office by yourself, you’ll be doomed to fail in a franchise operation.
You must be a “Yes man/woman”. This gets back to the top down control issue. Even though you own the franchise operation, you’re still subject to control from the top. Franchise operations have strict standards and procedures that they insist on maintaining in order to maintain the integrity of their outlets company-wide. You have to be prepared to accept that arrangement, and to make it work within a tight framework.
You must have minimal personal obligations. This relates mainly to your life outside of your work. Even though franchises have success templates, you will still be required to work an ungodly number of hours, particularly during the first year or two of operations. If you have heavy family, social, and recreational obligations outside of work, a franchise may not work for you. In most cases, investing in a successful franchise requires a complete commitment of your time.
People can make serious money investing in a franchise. But you have to understand what you’re up against – the benefits you will gain measured against the price that you will pay in all forms – and be ready to do your part.
How about you all? Have you ever considered starting a franchise business, or know of someone that did? What was your/their experience like?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/wfyurasko/4003382676/sizes/n/
