May 2011 Buying a Franchise
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Buying a Franchise

By Steve Strauss. ARCHIVE:

Ray Kroc, the founder of the first franchise, McDonalds, once explained franchising in a simple sentence: “In business for yourself, but not by yourself.”

Starting a business from scratch is akin to baking bread from scratch. It takes trial and error, and several bad batches, before you figure out what works. On the other hand, starting out by buying a franchise is like getting a good recipe right from the start. Because the franchisor has already baked some bad loaves and has learned how to avoid repeating those mistakes, because the trial and error stage has already been handled by someone else, and because you will be buying, among other things, that expertise and wisdom, buying a franchise greatly reduces the risk inherent in entrepreneurship.

That said, there are both pros and cons to buying a franchise. Let’s consider each.

Pros: Maybe the best part of buying a franchise is that you are buying into a (hopefully) proven system. Here is how it is supposed to work: Say that somewhere some business owners created a successful business that they believed could be duplicated; that is, the reasons and methods for their success were things that could be systematized and taught. So the business owners reduced their success to a step-by-step plan. That system, that business model, is the franchise.

The idea is that if you do what they did, you will get the results that they got. A good franchise then is a systematic way of doing business whereby you agree to do things the franchisor’s way and are being allowed to use their business name, logo, system, and so on. So the first benefit of franchising is that you theoretically reduce your risk of failing as you are buying a proven system.

The second good thing about buying a franchise is that you should get plenty of help. Whereas when you start a business from scratch you are on your own, when you start a franchise, the franchisor is there (or should be) to help you succeed. They offer expertise in a wide variety of areas. A good franchise system trains you to be a successful businessperson.

The last benefit of franchising is that you will get assistance with your advertising and marketing, and with the bigger franchise systems, you will get the benefit of their national advertising campaign. 

Cons: While the benefits of buying a franchise are significant, the downsides should not be minimized. The first is that it can be is fairly expensive to buy a franchise. When you are buying a franchise, you are buying the franchisor’s name, logo, goodwill, expertise, system, and training. That can be worth a lot, especially to a well-known franchise.

The second major drawback to franchising is that you will have less independence as a franchisee than you would as a regular entrepreneur. The system is the system, and you will agree in your franchise contract to run your business according to the system, even if you don’t agree to it.

This brings me to the last shortcoming with franchising. You will be in an unequal relationship with the franchisor. The very nature of the business arrangement, as well as the contracts you sign, put the franchisor in the power position. This is difficult for many franchisees, especially when something does not go right. There have been many lawsuits by franchisees against franchisors whom the franchisees feel are overreaching and domineering. Then again, there are plenty of franchisors with whom it is easy to work.

The thing to take away is that there are good franchisors and bad franchisors. It is in your best interest to do plenty of research so that you can rest assured that the company you decide to partner-up with is a good one.