In Today’s Business World, Is Investing in a Franchise Still Worth It?

For entrepreneurs, there are three major ways of owning a business: start-up, acquisition, and franchise purchase. Franchising offers the thrill of both start-up and acquisition.

Since its boom after World War II, franchising has remained a great business opportunity for entrepreneurs. With the proliferation of tech startups worth billions of dollars overnight, it is not unusual to wonder if investing in a franchise is still worth it compared to other ways of owning a business.

According to Franchise Fastlane, a franchise sales organization, most franchises fail to scale due to the owner's poor understanding of the business model. Some owners also treat their franchises as a side hustle and do not dedicate enough time and effort to operations.

This article will highlight the two sides of investing in a franchise to help you make an informed decision.

Pros of investing in a franchise

A franchise is a business contract where you purchase the right to sell a company’s products or services under their name and business model. The owner of the company or brand is called a franchisor, while the person buying the rights to use the brand’s identity is referred to as the franchisee.

There are lots of advantages that come with being a franchisee, provided you did your due diligence when choosing the franchise opportunity.

Established brand and reputation

According to a common saying attributed to Warren Buffet, a billionaire investor with billions invested in franchise companies, it takes 20 years to build a brand reputation. While some brands may develop identity and reputation within a short period, building a reputable company that has earned years of customers’ trust takes time.

Fortunately, franchisees benefit from the established brand recognition and reputation of the parent company. 

This can attract customers and build trust, even though your business is new. It can get you started on the path of success and profitability in no time.

Proven business model

The most difficult part of owning a business is the startup stage. Regardless of how fantastic the business idea looks on paper, reality usually differs. 

About 49.4 percent of new businesses fail within the first 5 years, and 65.3 percent fail in their first 10 years.

Instead of spending most of your first few years of business trying to identify the perfect business model that works for your targeted audience, buying a franchise helps you skip the startup stage.

The parent company has a proven business model that has been tested and refined over time, reducing the risk of failure. You will have access to a system that you can instantly apply to your market, even if you have little or no industry experience.

Ongoing support and training

Employee management and training are the biggest challenges small businesses encounter when they start scaling. However, with years of experience, franchisors would have discovered an easier route to doing this.

To replicate their system across all franchises, they will continually provide support, including employee training. Even if they do not offer this directly, they will provide you with plenty of knowledge and advice about the business and mistakes to avoid to ensure success.

Reduced operation cost and risk

Franchisors order things in bulk for their franchisee, which can significantly reduce the cost of operation for their franchisees. This can help you achieve profit faster than running your own business, which might come with a higher operating cost.

The brand recognition and reputation can also save you the cost of advertisement and marketing. In addition, the parent company will promote your business via nationwide campaigns broadcast on TV, radio, and online.

Like any other business, a franchise is not risk-free. However, its failure rate is lower than that of independent businesses. Franchises already have a proven business concept that can guarantee demand for your product or service.

Cons of buying a franchise

Although franchising offers entrepreneurs lots of advantages, it also has its shortcomings. Moreover, no business model is perfect.

Initial investment

The initial investment for buying a franchise can be high, depending on the business. Generally, this usually includes franchise fees, startup costs, and ongoing royalties.

Regardless, the initial investment is usually cheaper than what it will cost to build a brand like that of the franchisor from scratch.

Contractual agreements

The purchase of a franchise is usually sealed with a contractual agreement. This will highlight all the things you can and cannot do as a franchisee.

Violating any of the terms of the agreement can cause trouble for your business.

Potential for conflict

While the contractual agreements state what is expected of the franchisor and franchisee, it is possible for disagreement to arise. This can negatively impact the business.

To avoid this, do your diligent research about the franchisor before purchasing their franchise.

Contracts are not permanent

When you buy a franchise, the deal is usually for a time frame. When it ends, the franchisor may decide not to renew your contract.

However, abiding by the terms of the contractual agreements can improve your chance of getting your contract renewed.

Reputation management issues

No matter how well you manage your franchise, its reputation is still linked to the parent company. If the national office or another franchisee is rocked by a scandal, your business can be affected.

Tips for running a successful franchise

Even though the national franchise may have done all the groundwork to build the brand and its reputation, you need to put in the work as a franchisee for your business to grow and yield profits.

Below are some tips:

• Ensure the franchise is a good fit for your target audience or the community where it is located.
• Follow the national franchise system to preserve brand identity and consistency.
• Offer your customers the best service.
• Train your employees, recruit the best, and acknowledge them for their contributions to the business's success.
• Try as much as possible to minimize operating costs and maximize sales.