Starting A New Business: Should I Buy A Franchise?

BY MARK A. WILLIAMS

This is the first in a series of articles addressing strategies for entrepreneurs starting a new business. This article will focus on a type of “pre-made business” known as a franchise. when you purchase a franchise, you buy a mentor, a business system and a business partner. The franchisor provides you with a pre-built business. If you are looking for creative freedom or exclusive control, many franchises will not be able to accommodate; however, a good franchise, in a good location, can be one of the most successful businesses available to a new business owner. while the law provides certain special protections to franchises, the Franchise Agreement will control your relationship with the franchisor. When considering a franchise, the following are important questions to answer:

What are the costs?

Understanding the costs of owning a franchise is difficult. You will likely have an up-front franchise fee, a royalty on your sales, a contribution toward franchisor marketing expenses and required training costs. Further, you will incur indirect costs. You may have to purchase your advertising, raw materials, construction, inventory or finished products and services from the franchisor or their selected vendor. The franchisor is trying to maintain a consistent brand. That consistent brand will provide an immediately recognizable product or service to your customers, but that recognition comes at a cost.

How much say do I have in how my business operates?

It is very common for the franchisor to have the right to approve your business location, construction companies, adverting, the name of your business, the types of customers you can solicit and how much you can charge. The franchisor will always control the look and feel of your business and require consistent branding. Because you are buying an established brand, you will little say over how that brand will develop.

The level of control exercised by a franchisor is usually not direct. The franchisor will not send a person to run your business. The franchisor will, however, often provide required training and require the right to approve your products, marketing, vendors and business plans. The involvement of the franchisor is the reason that many new business owners choose this format of business. The success rate fo the franchise exceeds that of other start-up businesses.

How do I get out of the business if it isn’t working?

You will usually be required to continue the franchise for a long period. You can usually renew the franchise as long as you are in good standing with the franchisor, pay an additional franchise fee and invest in “refreshing” your business. A franchise is a long-term commitment that usually ends will you selling your franchise or simply allowing the business to close. If you want to get out early; there maybe substantial fees you have to pay. Even if you business fails and you have to close, it is possible that you will still owe money to the franchisor.

metroMAGAZINE, May 2011