By Erica Lemp, Editor,[email protected]
During the May 19th Startup Quest session, participants heard from local entrepreneur and very successful Dunkin Donuts franchisee, Keith Johnson. Keith discussed his reasons for becoming a franchisee, but also touched on the positive and negative aspects of franchising. As with any entrepreneurial endeavor, there are very definite risks involved with franchising – however, the rewards can be great if you are willing to take those risks.
In his recent Florida Trend article, Jerry Osteryoung discusses this very topic. One of the greatest appeals of opening a franchise is the instant name recognition and brand loyalty that comes as part of the package. Franchise owners therefore don’t need to do the same marketing, brand building and PR as other small business startups and have a much lower failure rate.
That being said, franchising doesn’t guarantee success. There are a lot of risk factors and cons to this type of business arrangement – after all, if it were easy and risk free, every one of us would own a McDonalds or a 7-Eleven. Randall Hansen, PhD from Quintessential Careers lays out some of the pros and cons.
Pros of Franchise Businesses
- Marketing Support. Franchises often have the support of a national campaign, as well as prepared marketing materials for a local campaign.
- Reputable Suppliers. Franchisors often have established relationships with suppliers for all the materials franchisees need.
- Business Support. There’s a saying in franchising: “You’re in business for yourself, but not by yourself” because you have a network of support.
- Training. Some of the better (and more expensive) franchise operations offer management and technical training.
- Financial Assistance. Some franchisors provide loans and other assistance to help franchisees.
The Boss is You. As with owning any business that you own, you are in control of your destiny.
- Reduced Risk. For all of these reasons, starting a franchise of an established brand often has less risk than starting a business from nothing.
Cons of Franchise Businesses
- Franchising can be EXPENSIVE:
- Initial Payout (Franchise Fee and Start-up Costs). Some of the bigger franchise operations can involve a very large initial costs, often more than what it would cost to start your own business.
- Royalty Payments. For as long as you are a franchisee, you will have to pay some percentage of the monthly gross back to the franchisor, reducing your profit potential.
- Marketing/Advertising Fees. To receive the wonderful marketing support from the franchisor, franchisees must pay these fees, according to some contracts.
- Limited Creativity/Flexibility. Most franchise contracts have very explicit standards, allowing little or no alterations or additions to the brand, stifling any creativity on the part of the franchisee. You must use their system, follow their rules.
- Sole Sourcing. Some franchise contracts stipulate that franchisors must buy supplies only from an approved list of suppliers, possibly at a higher cost.
- Locked into Operation by Long-Term Contract. If you don’t do as much research as you should have and find yourself with the wrong franchise, you may be stuck for many years.
- Dependent on Franchisor Success. The reputation of your franchise is only as good as that of the franchisor, so any difficulties that the franchisor encounters will have a direct impact on you.
Whatever path you choose, be sure to do your research and choose the right business model for you.