Advantages & Disadvantages of Buying an Existing Franchise

An idea well conceived is half the job done, but getting from conception to reality is another tough journey. When we think of a business, we want to hit the ground running and get it up and running in very little time. Investing in a franchise might seem like the sensible move for an entrepreneur, given that a business model already exists and you only need to contribute to it. But is it that easy? Let us look at some of the advantages of investing in a franchise.

Advantages of Investing in a Franchise

A pre-built successful business

Starting your own business is harder than running an established franchise. When you invest in a business that has already been developed, you do not have to set everything up and get it running before you can start making money, because that has already been done. At that point, your goal changes to enjoying the benefits of their labor. Franchises frequently come with strong backing from their parent firms, and in some cases the franchisor even contributes starting capital, which gives new owners reassurance in case things do not work out as expected. Given inflation and other market risks today, that backing matters. Investing in an established brand can feel like a less intimidating first step for those who are risk-averse than striking out on their own.

Takes less time to get started

One of the benefits investors most appreciate about a franchise is that it requires less time and money to get the business off the ground at the start. When you buy a franchise, you can avoid coming up with original brand, marketing, and service ideas because the franchisor provides most of them. This saves you time and energy as you run your business. In many cases you also get access to training and help with marketing. The idea of starting a company from scratch terrifies a lot of people because of the heavy costs and the risk of failure. Buying a franchise can ease some of that anxiety. If one of your locations underperforms for any reason, you are not completely on your own and without a fallback.

Easy brand recognition

When you purchase a franchise, you are investing in an established business model with a track record of being profitable. Your business gains quick awareness from a well-known brand, which can also help bring in new customers. With a recognized brand behind you, you spend less time worrying about how to promote yourself and more time growing your business. Large quick-service chains, for example, operate tens of thousands of locations worldwide, so a new franchisee can start earning sooner rather than spending months getting people interested in what they are selling.

Guidance from the best

The franchisor already has deep experience running the franchise and can help you understand the nuances of running a successful business. What if you decided to ignore this and build your own business strategy instead? Having a strategy is to your advantage, but it does not guarantee that your firm will succeed. You may have reasonable ideas and objectives, yet success is still not guaranteed, because there may be several variables you have not thought of. How much of your own money are you willing to risk at the beginning? How long can you go without results? And as an entrepreneur, what can you do that, beyond mitigating risk, helps your business stand out from its rivals?

The good news is that there are solutions to these problems. Most operating franchises provide training and support materials for new owners. Have a conversation with local franchisees about their own experiences, and ask whether the company gives new owners training sessions or an orientation program.

Now let us look at the disadvantages of investing in a franchise, again from a franchisee's point of view.

Disadvantages of Investing in a Franchise

You own a part of a whole

Keep in mind that when you purchase a franchise, you are paying for the privilege of being part of a particular brand. You are not the sole proprietor of the organization. Instead, you are renting the name of another person's business. Beyond the upfront costs of operating, most franchisors make their profit by charging outlet owners a modest percentage of total sales. This means the franchisor receives a share of the profit that you worked hard to generate in exchange for the right to use the franchise name. There will be continuous charges, and the more successful you are, the more you pay. These costs can take the form of royalty fees or a share of the profits.

Potential for conflict

The franchisor and franchisee have an advisor and advisee relationship. Much like other human relationships where one advises the other, there is potential for conflict here too. Whether the franchisee has a legal right is determined by the franchise agreement the franchisor prepares. Although the agreement details the obligations both parties are expected to fulfill, the franchisee has very little authority to enforce it, and there may be a protracted legal battle before a favorable outcome for the franchisee. The closeness of the business relationship makes disagreements more likely, whether from a lack of support or a clash of personalities. This is why many franchisors screen franchisees using personality tests.

Lack of financial privacy

The lack of privacy that franchisees experience is another important drawback of franchising. The franchise agreement may well state that the franchisor has complete control over the entire financial ecosystem of the franchise. Franchisees can see this lack of financial privacy as a downside, though if you are open to receiving financial counseling, the drawback may be less of an issue for you.

Closing words

Despite the disadvantages, there are several advantages to investing in a franchise, and the drawbacks above are modest next to the upside. The lack of a need to build a business model, the visibility on cost, and the shorter time to ROI all make it a worthy investment. If you are a franchisor looking to manage your franchisees more closely, book a demo to see how Delightree can help.