Pros and Cons of Investing in a Franchise

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Friday, September 2nd, 2016

Investing in a franchise can help you become a business owner who is part of an industry worth approximately $2.1 trillion. With an estimated 900, 000 franchise businesses in operation, it’s easy to assume that investing in a franchise is a safe way to grow your wealth.

But is investing in a franchise really as simple as it seems? Before you leap in, it’s important to consider the pros and cons of this type of business opportunity.

Investing in Existing Infrastructure

Starting a new business is a daunting process, particularly when there is no infrastructure in place. Logistics such as a store front, supply chain, and staff all have a direct impact on the success or failure of your new business, which means it’s crucial you have the right systems in place.

One of the main advantages of investing in a franchise is that the majority of the business hierarchy is in place. In most cases, you will be applying the franchise template to the outlet you’ve found and think might just make it. Your franchise business plan simply needs to make a valid case for opening a new location, and if you can raise the capital you need, you’re in business.

Unlike starting from scratch, investing in an existing model can make it easier to succeed.

Access Support Structures

Another advantage of investing in a franchise business is that you have access to the support of the franchise owner. Most successful franchises empower new owners with all the paper work, planning documents and advice they need to succeed, because the success of each store grows the franchise as a brand.

Having access to an experienced team of people who understand the challenges that the brand faces will make it easier for you to overcome problems specific to your location.

Marketing Familiarity

One reason why so many aspiring entrepreneurs consider investing in franchises is that in most cases, potential customers are familiar with the brand.

Think about opening a well-known restaurant such as a Burger King. The majority of people in your area have probably heard of the company, and sampled the food. This means that you’ve already earned their trust, and that goes a long way in helping to drive your success.

Building consumer trust is crucial to getting a new business off the ground, and opening a franchise outlet means the majority of that work is done for you.

From support structures to a competitive advantage, there is a strong case to be made for investing in a franchise business. But what are the potential disadvantages?

The Profits Are Shared

When you invest in a franchise you need to remember that you pay for the right to become a part of that particular brand. You’re not the sole owner of the company – rather, you’re renting someone else’s brand.

Apart from initial operation fees, most franchise owners charge outlet owners a small percentage to make money for themselves. This means that a portion of the profit you work so hard to generate goes straight to the franchise owner.

Whether it’s royalty fees or a percentage of the profit, your initial investment will be accompanied by ongoing costs, and the more successful you are the more you end up paying.

Little or No Freedom

Most aspiring business owners have a spark of business creativity or imagination that prompts them to consider investing in themselves. It’s that skill that allows them to find innovative solutions to business problems, or see opportunity where others don’t.

When you’re investing in a franchise, you are committing to their formula and rule book. One of the fundamental elements of franchise success is consistency and brand uniformity. That means you’re going to be told what specials to run, what your staff should where and how you should crunch the numbers.

While you may be allowed outlet-specific promotions, one of the biggest challenges when investing in a franchise is that you can’t do what you want, and will need to play by the rules and wait for approval before making potentially profitable changes.

Delivering on Targets

A common problem business owners discover when investing in a franchise is that they are expected to make targets to stay afloat. Although every business owner has an idea of how they need to do in order to stay in business, having to report to a board of franchise owners adds another level of pressure.

As much as franchise owners understand the struggles of opening a new outlet, this additional pressure to succeed makes investing in a franchise even more stressful than opening your own company.

What do you think are the pros and cons that come with investing in a franchise?

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