When you start running your own business, you want to avoid potential problems if you can. Joining a franchise can help you mitigate against some of them - but is franchising risky as an investment venture? Let’s weigh up the pros and cons.
Some people distrust franchising and associate it with pyramid schemes, but it’s a completely legitimate investment opportunity for hard-working entrepreneurs. Becoming a franchisee is a fantastic way to build a profitable business and join a network of like-minded entrepreneurs - and many people across the globe have done just that.
Of course, like any business venture, franchising comes with its own set of risks, as well as benefits. By understanding the potential drawbacks of the model, you can decide whether to go ahead with an investment. So, what are the risks of the franchise business model?
The risks of franchising
Here are some of the main obstacles you might come up against as an aspiring franchisee.
1. The franchise doesn’t work in your location - Franchising is all about replicating a successful business, but not all franchises do well in every region. They are only viable if they have a straightforward model which translates well across markets. In theory, an investor might set up a franchise unit from an apparently successful brand, and end up failing because of their territory’s unsuitability.
2. The operations manual isn’t comprehensive - The success of a franchise unit depends on the franchisee’s ability to replicate the original concept - and they can’t do it if the operations manual isn’t up to scratch. Not only should the handbook explain the business’s strategies, but it should also detail important brand regulations to maintain consistency across the network.
3. The franchisor fails to develop the business - A franchise might be successful, but if the franchisor doesn’t spend time innovating and adapting the brand, it could quickly become outdated. Customers value relevant businesses, so failing to evolve or provide solutions for current issues could lead to failure.
4. The franchisor doesn’t protect the brand - Franchises are built on consistency, providing a reliable product or service for customers across the network. So, franchisors must put strong rules in place to stop investors straying too far from the business’s original concept. If they fail to reprimand those who don’t comply, other franchisees may also deviate from the established strategies, which could lead to a drop in consistency.
5. The franchisor tries to grow too quickly - Getting carried away can lead franchisors to hire unsuitable franchisees or expand the network before implementing enough resources to support it. The quality of training and ongoing support could fall, leading to poor performance.
6. You have a false sense of security - Buying into a franchise has many benefits, but the model doesn’t guarantee success. While the franchisor’s previous successes and ongoing support can make it easy to feel confident, you’ll need to put in the work, as becoming complacent can cause issues.
7. You don’t have enough working capital - Being undercapitalised is one of the most common reasons for franchisee failure. If you underestimate how long it’ll take to start turning a profit, you may struggle to afford the ongoing franchise and royalty fees, as well as your other business expenses.
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- Franchising 101: The Pros and Cons of Franchising Your Business
Almost everything worthwhile carries with it some sort of risk, whether it’s starting a new business, whether it’s leaving home, whether it’s getting married, or whether it’s flying into space.
–Chris Hadfield, former astronaut, engineer and Royal Canadian Air Force fighter pilot
The benefits of franchising
We believe the advantages of franchising outweigh the risks. Here are some of the biggest benefits:
1. You get help with funding - Many franchises have links to banks and other lenders, helping franchisees access up to 70 percent of their investment total.
2. You can learn on the job with expert tutoring - Franchisors have been in the industry for years or even decades, so they have plenty of wise words for new recruits. Plus, franchisees usually complete training schemes within a few weeks, so they can start earning money quickly.
>> Read more:
- 5 Tips for Developing Your Employees into Future Franchisees
- Being a Successful Franchisee Means Adopting an Entrepreneur Mindset
- 7 Common Habits of Successful Franchisees
- Mythbusters: Common Misconceptions About What Makes a Successful Franchisee
- Five Tips for Boosting Your Self-Confidence as a Business Owner
- Traits of an entrepreneur
3. You get access to a support network - When you become a franchisee, you can rely on help not only from your franchisor, but also the network of people who have already invested in the business. During meet-ups, you can share insights and tips.
4. You gain security through a proven model, reputable brand name and existing customers - The biggest perk of the franchise model for franchisees is probably the chance to gain security while launching a business. Everything is already set up; you just need to replicate the concept in your territory.
5. You can secure an exclusive territory - Most franchisors offer their franchisees a protected territory, which means the business will never let another investor operate within your area. As a result, you’ll never have to compete with another franchisee from the brand.
6. You can lower your expenses - If a franchise has several branches all buying products from one supplier, franchisees may be able to access exclusive discounts from the grateful distributor. This increased buying power gives franchisees the chance to cut their outgoings and generate more profit.
7. The franchisor understands how to grow the business - You’ll join a franchise run by someone who has already demonstrated the value of their industry experience. If they have a good track record, you can be fairly confident they’ll continue to develop and adapt the business to avoid future problems.
8. You’ll have a high chance of getting a good price for the business when you leave - If you choose to sell your franchise unit on at the end of your contract period, the franchisor should be able to help you find a good buyer. Often, there will already be people lining up to buy a franchised business in a given territory, so you can enjoy the profits.
If you’re not a risk taker, you should get the hell out of business.
—Ray Kroc, instrumental player in the growth of McDonald’s
Is franchising risky?
Running a franchise business contains an element of risk - like any investment venture. But choosing to become a franchisee rather than launch an independent start-up usually involves a safer path to success.
Most of the dangers in the franchise system can be avoided with a bit of research. By choosing a reputable franchisor, analysing your finances and making sure your territory has enough demand for the business’s products or services, you can set yourself up for success.
Yes, there are risks involved in buying a franchise - but there are also a lot of exciting possibilities. Our franchise guides can help you boost your understanding of the industry, prepare for potential problems and take advantage of opportunities. Take a look if you’re ready to succeed in the franchising world.
Alice Tuffery, Point Franchise ©