February 19, 2015 by Diane Loupe Buyer Articles, Buyer FAQ, Buying a Business, Seller Articles, Seller FAQ 0 comments
Why Buy a Franchise?
By Mark Jones, Franchise Systems Advisors
Owning a business is part of the American dream and owning a franchise can make that dream a reality for many people who otherwise wouldn’t have the opportunity. People are attracted to franchises because the best ones have proven to be extremely successful over the years. They combine many of the benefits of business ownership with the brand name, experience, and economies of scale provided by the established corporate franchisor. In fact, many studies suggest that good franchises generally have a much higher success rate than other types of businesses. Let’s take a look at the advantages of franchising:
Advantages of Franchising:
- Risk minimized. A reputable franchise is a proven business method. They’ve been through the ups and downs and know what works and what doesn’t work. That keeps the new business owner from repeating the same mistakes.
- Name recognition. A well-known name can bring customers into the business and provide a competitive advantage for the franchisee.
- Training. A franchisor can provide a regimented training program to teach the franchisee about the business operation and industry even if the franchisee has no prior experience. Training is usually done at the office of the franchisor and at the local location.
- Support. A franchisor can provide managerial support, software support and problem-solving capabilities for its franchisees. This support is there during the start up phase, but also continues for the term of the franchise; usually 10 or 20 years.
- Economies of scale. Cost savings on inventory items can be passed on to the franchisee from bulk purchase orders made by the franchisor.
- Advertising. Cooperative advertising programs can provide national exposure at an affordable price.
- Financing. A franchisor will generally assist the franchisee in obtaining financing for the franchise. Lenders are more inclined to provide financing to franchises because they are less risky than businesses started from scratch. In fact, the SBA keeps a list of the “approved franchises.”
- Site selection. Most franchises will assist the franchisee in selecting a site for the new franchise location. Having the right location is all powerful and most franchises have a connection to a local real estate professional to assist in site selection.
- Vested Interest / Royalty. Most franchises charge a royalty. This fee, charged for the use of the name and the ongoing support given to the franchisee, is usually around 5% of the franchisee’s sales. In other words, for every dollar the franchisee makes, the franchisor gets a nickel. This gives the franchisor a direct interest in the success of the franchisee. The more successful the franchisee, the more successful the franchisor. In simple terms, the more money the franchisee makes; the more money the franchisor makes. Thus, the commonly heard phrase; “In business FOR yourself, but not BY yourself”.
Disadvantages of Franchising:
A franchise is probably not a good fit for the TRUE entrepreneur. Franchises are usually very successful because they have created a “Road to Success.” Follow step 1, step 2, step 3, and you’ll be successful. The true entrepreneur wants to blaze his or her own trail and doesn’t like to follow someone else’s plan.
A business broker will typically be involved in the sale of an up-and-running, existing franchise. Brokers usually deal with franchisees who are looking to sell their own locations. In such transaction, the new purchaser must be approved by the franchisor.
When I sell a brand new franchise, I act as a representative of the franchisor and, therefore, I must comply with the guidelines set by the Federal Trade Commission. The FTC oversees all franchise sales and restricts what I can tell a prospective franchisee.
If you or a client are interested in purchasing or selling a franchise, call me and I can advise you on ways to negotiate the most equitable transaction.