When you think of owning a business, one option that comes to mind is owning a franchise. It's a popular choice because it allows you to own and operate a business with the support of an established brand and business model. However, owning a franchise isn't for everyone.
We are hopeful that this legal guide on the pros and cons of owning a franchise can be useful to you in your decision making process because it provides valuable insights into the legal and business implications of owning a franchise. Making an informed decision about whether to invest in a franchise requires a thorough understanding of the advantages and disadvantages of this type of business model and structure. This legal guide can help you (as a potential franchisee) to understand the legal obligations, risks, and duties involved in franchise ownership, including franchise fees, contractual obligations, and territorial restrictions. Additionally, this legal guide can help you identify potential risks and pitfalls associated with franchise ownership, including limited independence, limited creativity, and potential financial loss. By understanding the legal implications of franchise ownership, you can make informed decisions about whether the franchise business model is the right fit for your goals and objectives.
In this legal guide blog post, we'll discuss the pros and cons of owning a franchise, so you can make an informed decision about whether it's the right choice for you.
Pros of Owning a Franchise:
In this section we will take a deeper look at the benefits of owning a franchise.
1. Established Brand Recognition:
Owning a franchise can give you immediate access to an established brand name that people already know and trust. This can be particularly advantageous for new business owners who may struggle to establish their brand in a competitive marketplace. By leveraging the brand recognition and customer loyalty that comes with a franchise, owners can potentially save time and resources that would otherwise be spent on marketing and advertising efforts. Additionally, established brand recognition can help attract customers to your business and give you a head start in building your client base.
For example, if you were to open a McDonald's franchise, you would be able to benefit from the well-known golden arches logo and the established reputation for fast, convenient, and affordable food. This could help you attract customers who are already familiar with the McDonald's brand and trust it for quality and consistency.
2. Established Business Model:
Franchises come with an established business model that has been tested and proven to work. This can save you a lot of time and money in trying to figure out what works and what doesn't. The franchisor has already developed a successful formula for operating the business, which includes everything from the menu or product offerings to the layout of the physical space. This established business model can help you avoid costly mistakes and streamline your operations from day one.
For example, if you were to open a Subway franchise, you would be provided with an established business model that includes a specific menu of sandwiches, salads, and sides, as well as a specific way of preparing and serving them. This established model has been proven to work in hundreds of other Subway locations, which can help you achieve success more quickly than if you were starting from scratch.
3. Training and Support:
Franchisors provide training and ongoing support to their franchisees. This can be invaluable in helping you get your business up and running and keeping it successful. Training typically includes everything from how to operate the business to how to manage employees and handle finances. Ongoing support can include assistance with marketing, advertising, and other operational issues.
For example, if you were to open a 7-Eleven franchise, you would receive extensive training on how to manage inventory, handle cash, and operate the point-of-sale system. You would also receive ongoing support in areas such as advertising, product promotions, and operational efficiency.
4. National Advertising:
Franchisors often provide national advertising, which can help drive business to your location. This can be especially beneficial if you're in a competitive market. National advertising campaigns can include everything from TV commercials to print ads to social media promotions. By leveraging the franchisor's national advertising efforts, franchisees can potentially reach a larger audience and attract more customers.
For example, if you were to open a Supercuts franchise, you would benefit from the national advertising campaigns that promote the Supercuts brand and services. These campaigns could help attract customers who are looking for a convenient and affordable haircut.
5. Easier Financing:
Banks and lenders are often more willing to lend to franchises than to independent businesses. This is because franchises are often seen as less risky due to the established brand name and business model because franchises have a proven track record of success. This can make it easier for franchisees to secure financing for their business, whether it's through a traditional bank loan or an SBA loan.
For example, if you were to open a UPS Store franchise, you might find it easier to secure financing from a bank because the UPS brand is well-known and trusted. The established business model, which includes everything from shipping and printing services to mailbox rentals, could also make the business appear less risky to lenders.
Cons of Owning a Franchise:
In this section we will take a deeper look at the benefits pitfalls of owning a franchise of owning a franchise.
1. Franchise Fees:
Franchisees are required to pay franchise fees, which can be significant. These fees can include an initial fee, ongoing royalties, and advertising fees. These franchise fees are an important part of the cost of owning a franchise. These fees can vary widely depending on the franchisor, the industry, and the location.
For example, McDonald's franchise fees can range from $1 million to $2.3 million. Subway's franchise fee varies depending on the size and location of the franchise, but typically ranges from $15,000 to $30,000 (franchisees are also required to pay ongoing royalties of 8% of gross sales). According to the 7-Eleven Franchise Disclosure Document, franchisees are required to pay an initial franchise fee of $10,000 to $1,000,000, depending on the size and location of the store (with ongoing royalties ranging from 20% to 50% of gross profits). Dunkin' franchise fees range from $40,000 to $90,000, depending on the size and location of the store, and franchisees are also required to pay ongoing royalties of 5.9% of gross sales. Lastly, according to the Anytime Fitness Franchise Disclosure Document, franchisees are required to pay an initial franchise fee of $35,000 to $42,000, and ongoing royalties of 6% of gross sales.
It's important to note that these fees can vary depending on a number of factors, including the size and location of the franchise, the level of support provided by the franchisor, and the length of the franchise agreement.
In addition to the initial fee, franchisees are also required to pay ongoing royalties and advertising fees, which can also add up over time. This can make it difficult for some franchisees to generate profits and can limit their ability to reinvest in their businesses.
2. Limited Independence:
Franchisees are required to follow the franchisor's business model and guidelines. This can limit your ability to make changes or adapt to local market conditions. While owning a franchise can provide a turnkey business model and established brand, franchisees have limited independence in terms of decision-making. This can also limit a franchisee's ability to adapt to local market conditions or to make changes to their product or service offerings.
For example, a Jersey Mike's franchisee may not be able to change the menu or add new items to it without the franchisor's approval. This can be frustrating for franchisees who want to be more creative and responsive to their customers' needs.
3. Limited Creativity:
Franchisees often have limited ability to make changes to the products or services they offer. This can limit your ability to differentiate your business from competitors. Franchisees are also often limited in terms of their ability to differentiate their business from competitors. While owning a franchise provides a proven business model, it also means that the franchisor has established a brand and product or service offerings that franchisees must adhere to.
For example, a Starbucks franchisee cannot create a new coffee blend without the franchisor's approval. This can limit franchisees' ability to be creative and innovative in their businesses, which may be a disadvantage in highly competitive markets. This is also a common problem for someone who wants to "be your own boss" and has aspirations of being an entrepreneur.
We often recommend that our clients make sure that they are ok with following orders for the first several years of owning their own franchise.
4. Reputation:
Franchisees are also tied to the reputation of the franchisor. This is one of the biggest risks of owning a franchise, as you are tied to the reputation of the franchisor. If the franchisor has a bad reputation or experiences a public relations crisis, it can reflect poorly on all franchisees.
For example, in 2015, Subway's reputation was damaged after its former spokesperson, Jared Fogle, was sentenced to prison on child pornography charges. This had a negative impact on the entire Subway franchise network, including franchisees who had no involvement in the scandal. Franchisees may have little control over the actions of the franchisor or its executives, but they still bear the consequences of any negative publicity.
5. Limited Territory:
Franchisors often limit the territory in which franchisees can operate. This can limit your ability to expand your business or move to a more profitable location. This means that franchisees are often limited in terms of the territory in which they can operate. This can be a disadvantage if the franchisee wants to expand their business or move to a more profitable location.
For example, a Domino's franchisee may want to open a new location in a nearby town, but if that territory is already taken by another Domino's franchisee, they may be prohibited from doing so. This can limit franchisees' ability to grow their businesses and take advantage of new opportunities.
Is owning a franchise worth all of the pitfalls of owning a franchise?
Owning a franchise can be a great way to own and operate your own business, with the support of an established brand and business model. But the real question you may be asking yourself is: Do the benefits of a franchise outweigh the pitfalls of owning a franchise?Franchise ownership can be a great way to transition from the corporate world to having your own independence and autonomy. However, it's not for everyone. Before making a decision, it's important to carefully consider the pros and cons of owning a franchise. Consulting with a knowledgeable franchisee attorney can help you understand the legal implications of franchise ownership and ensure that you make an informed decision.
If you're considering owning a franchise, contact Lopes Law today to schedule a consultation.