5 things to consider before buying a franchise- Is it right for you?

Deciding to buy a franchise or a business in general can be a stressful decision. Therefore, it is crucial to conduct thorough research before making a commitment. There are numerous advantages and disadvantages to owning a franchise that should be carefully considered.

You don’t want to invest all of your time and money into a franchise and figure out it was the wrong move for you. It can often be very hard to get out, and you don't want to be trapped. Make sure you are aware of as much as possible before jumping in.

Here are just a few things that I would think about before buying a franchise:

Am I ok with not being in full control of my business:

When you are a part of a franchise you have control of what happens within the 4 walls of your building, albeit under strict guidelines, but that’s pretty much it. The corporate franchise headquarters is responsible for significant business determinations that can directly affect your business and wellbeing.

There is a corporate team that dictates your pricing, costs and bottom line. You can work more hours to reduce labour costs, try to have a more efficient business, spend local marketing dollars more effectively, but ultimately the big decisions are coming from someone that isn’t you. This can be frustrating if you don’t think they are doing enough or making the right decisions.

Will you hit a glass ceiling?

I think a franchise is an amazing opportunity for a lot of people. You have almost everything ready to go for you on day one with a very detailed plan of how to be successful. You also don’t have to worry about ongoing things like sourcing, marketing, operating procedures, and menu creation for food service franchises, which in my experience is very nice and helpful. You already have so many things to focus on as a business owner. There is a chance if it's an established franchise that you can be profitable right away as well. In our case we had good sales on day one of operation.

That being said. If you are a high achiever and will be running as fast as you can to grow your franchise's sales and profitability, you may hit a glass ceiling when you are a part of a franchise. You will be doing things faster than the rest of the chain. You will want to try new things, thinking outside of the box to grow your sales, but you might be hit with resistance from the franchise, because you must do things exactly the same way as the rest of the chain. You often see the only real way to exponentially grow as a franchisee is by buying or opening more locations, and there will be a long list of conditions to meet before becoming a multi-unit franchisee.

It can often be frustrating when you are sharing your ideas for growth or better operations, yet the franchisor ignores them and does their own thing. McDonalds has been in the news lately where their franchisees are frustrated with all of the changes the franchisor is making despite them voicing their concerns. You can review the articles here and here.

The articles also showcase another aspect of franchises to take into consideration. Your operations will be under constant scrutiny from the franchisor. Now, this can be seen as a good thing, where you are forced to be running an A level location at all times, and that should be good for business, but where it may be detrimental is when it gets pushed so far and franchisees and staff are placed under immense pressure. There may also be changes to the way you must operate at any given time and you must change and adapt immediately. These franchisor decisions can have a severe impact to your mental health and business profitability.

Am I ok with paying all of the fees and costs involved:

Franchises charge a bunch of fees on everything that has a major impact to your bottom line. Your biggest fees will be your original franchise fee just to allow you to become a franchisee, then there is the monthly royalties and shared advertising fund. On Top of that there can be fees for training, location audits, renewal fees, technology lease fees, transaction fees, renovation fees, grand opening fees etc. They can charge a fee on anything. I saw a gym franchise that charges you a DJ fee for using their selected DJ’s at the gyms. A breakdown of all fees can be found in the Franchise Disclosure Document (FDD).

For the advertising fund, keep in mind that you usually pay a percentage of sales to the fund, and you might not be getting equal value to that fee. Some franchises charge a flat monthly advertising fee of say $2000 per month no matter your sales, but others charge anywhere from 1%-6% of your revenue. So if a franchise charges 4% for their ad fund, someone that is running a franchise location at $50,000 of monthly sales is paying $2,000 per month towards the fund, while say your location is doing $200,000 in monthly sales would be paying $8,000 per month. You, the higher volume franchisee, isn't getting any more value from the ad fund. You often won’t have any say in how this advertising fund is spent either.

On top of fees you may be required to only use equipment and product suppliers that are franchisor approved. You might be able to find a cheaper option somewhere else, but you will not be able to use the alternate supplier.

Sometimes the supplier will be owned or affiliated with the franchisor itself, which may cause a conflict as franchise profitability would not be the first priority.  An example of this is Quiznos subs, where it’s franchisees sued the franchisor, claiming that they were forced to purchase food products directly from Quiznos or its affiliates at a higher than market rate, and the franchisor would get rebates or kickbacks.

Another thing to note is that the franchise can force you to renovate or relocate your location at any given time which can cost you hundreds of thousands to millions of dollars. I don't always see this as a bad thing. A nice refresh of your business every so often will always be good for business. No one wants to go to a business that looks run down or ugly. Keep in mind though that there's a good chance you won’t have any say in the renovation or relocation process. Where I do take issue with it is if your location is still in great condition but since the franchise design may have changed you are forced to renovate. This just seems very wasteful environmentally and financially. The cost of renovations or relocations should always be factored into your decision when looking at the financial viability of a franchise.

Examples of just a couple fees franchises charge:

Subway: $10,000-$15,000 Initial franchise fee | 8% Royalties | 4.5% Advertising

Wendy’s: $50,000 Initial Franchise Fee | 4% Royalties | 3.5% Advertising

McDonalds: $45,000 Franchise Fee | 4% Royalties | Rent % based on multiple factors.

There will be many other fees that these franchises charge, but those are some of the big ones.

What is your exit plan?

When you own a non-franchised business you have full control of who you sell your business to. When you own a franchise, the franchisor has the final decision of who they are allowing to own your business. The franchisor might meticulously pick through any potential purchasers over a long approval process, delaying your exit.

If you think you are ready to sell, I suggest starting that process right away just incase it does take a long time to go through the sale process.

All for one, and one for all:

Your reputation is at the mercy of the brand and all other franchisees. If the brand or fellow franchisees do anything bad, it can tarnish your reputation and affect your business as well even if it had nothing to do with you. Example: If the franchisee in the next town has done something bad to land themselves in the news, there's a chance they might think the entire franchise is doing the same thing and have a negative impact on your reputation.

This is just a brief list of things you want to spend some time thinking about before buying into a franchise.

I think owning a franchise can be an amazing decision for many people. Everything is ready to go for you day one. You usually don't need to have experience because everything will be taught to you and have detailed instructions how to run the business. You can theoretically buy yourself a job and investment, with the option of later hiring a management team to give you more freedom over your schedule. It sometimes might be easier to finance a franchise business compared to a stand alone business if the franchisor has a good relationship with lenders. In my opinion there is less risk involved when it comes to buying into a well established franchise.

All of that being said, you should do extreme due diligence when you are exploring the ideas of owning a franchise. What are the answers to the questions above? Do they relate to the franchise you are looking into? Are you ok with all of it?

Reminder that you can always find more information in the FDD or ask fellow franchisees questions to make sure you have the full picture. Take some time to think if you want to go the franchise route or do something on your own.

Original post on my LinkedIn