The Pros and Cons of Franchise Ownership
Franchising is way more than food and retail! There are over 1000 franchise concepts in Canada today covering over 50 different industries, meaning there are a vast number of franchising opportunities that can enable you to own your own business. As I’ve said many times before, just because something is franchised, this doesn’t mean that it’s good, it just means it’s duplicated– so it behoves the wood-be franchisee to do thorough research prior to buying. Here are some critical things to consider about the pros and cons of franchise ownership to ensure that you choose a profitable business that suits your goals.
Naturally, there are varying degrees of risk across the franchise industry – while mature systems (usually 50+ units and franchising for 13 years +) enjoy the benefits of having an established brand, proven systems and processes and often a dedicated customer base, location availability can in issue; sometimes the specific industry sector can be suffering same-store sales decline trends, so being a mature brand is simply not enough. Mezzanine franchise systems (usually 10 – 50 units and franchising for 5 – 12 years) may not have brand potency, but there is often significant market opportunity. The franchisor should have been able to demonstrate that they are able to help franchisees successfully launch and build strong businesses in a number of different communities and markets. Although a lot of market opportunity and location availability exists, the franchisee will still have to do a lot of local brand building, as the franchisor’s brand is not yet well established. These concepts are often less expensive than mature systems. Emerging franchise systems (usually under 20 units and franchising for under 5 years) have similar traits of mezzanine franchise systems; however, the younger the system is, the less proof that exists to prove that the franchisor knows how to help its franchisees successfully launch in different markets, making it the riskiest area of franchising.
Of course like many business opportunities, owning a franchise has its ups and downs; below is a list of them in a bit more detail to help you decide if franchise ownership is for you.
Proven systems and processes – One of the single biggest benefits of buying into a strong franchise system is that you will be able to benefit from the proven systems and support they have developed in all aspects of running your business. These systems are designed to ensure that you avoid costly mistakes and keep you focused on activities that have been proven to generate success within the particular business.
Compression of time – This is another big benefit of buying a franchise instead of starting from scratch. By using the franchisor’s proven systems and processes, you should be able to compress the amount of time it takes you to get 1) from signing your franchise agreement to opening your business to the public; 2) from opening to break even; and 3) from breakeven to full stride (full stride is where you are generating the level of annual income that you want to maintain for several years to come).
Support networks – Franchisors offer plenty of support to franchisees, both right off the bat and continuing through the life of the franchisor-franchisee relationship. Some of these include marketing support through local campaigns to ongoing coaching and support, peer-to-peer experience sharing, and in some cases financial support through loans and other assistance methods. These kinds of support networks are things that independent business simply cannot duplicate, giving franchisees a significant competitive advantage.
Ongoing research, development and innovation – Innovations to systems, processes and product lines are an ongoing part of good franchise systems. Best practices consistently bubble up from the franchisee base and good franchisors have strategies to implement great ideas quickly that can be enacted in a system-wide manner. These innovations help ensure that franchisees stay ahead of their non-franchised competitors.
Lower prices for inventory – The ability of franchise groups to purchase mass amounts of inventory from regular suppliers gives franchisees increased bargaining power and lower inventory costs. As an independent business, you have less leverage when it comes to bargaining on inventory pricing. A caution here though, some franchisors have their own supply chains for quality control purposes and it is possible that it might be more expensive to buy from the franchisor than it is from the market. You will definitely want to research this aspect and understand the reasons and impacts.
Easier staff recruitment – It’s easier for a recognized brand to draw in potential employees than it is for an independent business that starts off relatively unknown. This is a particularly important benefit since finding reliable employees is one of the biggest keys to successfully running a business. Remember though, “speed of the leader, speed of the pack” applies here – if you’re not a good leader and/or treat your staff poorly, it won’t matter how good the brand is because you will always have staffing issues.
LowER risk – (note – not LOW risk) Because good franchisors provide proven systems and support already mentioned above, new franchisees are able to capture opportunity more quickly and also avoid a lot of costly mistakes than start-from-scratch owners; this significantly lowers risk and is one of the biggest benefits of buying a franchise. This is often more important than branding! Mature Franchises offer you the opportunity to jump into business with an established brand, which ensures you have a ready customer base, thus this poses far less of a risk than starting a business from scratch. You don’t need to worry about establishing brand loyalty because it will already be there, but you do have to engage the community where you’ll be doing business, regardless of brand strength. Remember though that branding only brings people to your door once, but how your staff treat them will determine whether or not they return… hence the greater importance of proven systems and processes!.
High start-up costs –There are start-up costs for every business, and franchises are often perceived as being more costly, in part due to the initial franchise fee (a one-time fee) which enables you to take advantage of the franchisor’s systems, processes and in some cases, branding. In start-from-scrath businesses, the costs are lower up front, but they are often more expensive in the long run because of the cost of mistakes made… It just takes a lot longer to figure out what the costs of the mistakes are.
I like to think of it this way – a “tutoring fee” will get paid… you either pay it to the franchisor, or you pay it over time in lost opportunity, costly operational mistakes, etc.
Marketing fees – Regular payments are required to cover the marketing and advertising support provided the franchisor, where every dollar you contribute doesn’t necessarily get spent in your immediate market. Instead, a portion goes to national and/or regional marketing, website optimization, etc. Of course, the benefits of your advertising contribution are usually worth it in the long run as you take advantage of the franchisor’s media buying rates as well as the collective brand building. Bearing this in mind, this is really only a con if your marketing programs are not drawing in enough leads for your immediate market.
Limited flexibility – Most franchisors will not take kindly to an overzealous entrepreneur trying to change things up. If you are the kind of business owner that wants complete creative control over your business, franchising is definitely not the best choice for you. However, there is a range of “flexibility” across many franchise systems – you have to do enough research to understand what the “secret sauce” is that cannot be changed in the system you are considering, and make sure that you can live with it.
Hard work ahead! – One of the biggest mistakes people make is assuming that as soon as they buy a franchise and open its doors, the business will come. This is a very dangerous assumption, as even with mature brands, it takes hard work and focused effort to get a business well established in the community that they are serving. Make sure in your research that you fully understand what the core roles are that the owner has to perform in order to drive success for the business, and how much time and effort these roles require.
Good franchise systems offer great business opportunities only when there is a strong alignment between core roles required to drive success in the franchise, and the franchisee’s transferable skills and interest in performing those core roles! . The bottom line is if you conduct your research thoroughly, you will know what you’re getting yourself into and hopefully find something where the benefits of owning a franchise are more than worth it!
Gary Prenevost is one of Canada’s leading franchise experts and has been an entrepreneur for more than a quarter century. He has been involved in a variety of successful non-franchised and franchised self-employed businesses. By exploring the ideal solutions that fit an individual’s desires and strengths, Gary helps senior and mid-level executives take a step back and objectively look at whether franchise ownership would be a viable and positive career choice. By playing to the individual’s transferable skills and passions, the franchise owner can enjoy less stress, greater success, more fun, and improved quality of life. For more information visit www.CanadaFranchiseExpert.ca or call 905-405-6300. In addition to being one of Canada’s top franchise matchmaking experts, also co-owns a master franchise and unit franchise for Alair homes, a custom home building and renovation company, so he is intimately familiar with the home improvement marketplace.