Last week we explored the advantages of being a franchise owner in depth. In this last chapter of the franchise blog series, let’s talk about the disadvantages of owning a franchise.

Franchisors want to make sure that all their locations look the same and carry the same products and services. They do not allow unapproved products and services.

WHAT TO BE AWARE OF BEFORE BUYING A FRANCHISE?

1. High Cost of Entry

Entering a franchise business requires upfront fees.  The fee ranges from about $150K to about $2.5M for the top 10 franchises.  A lot of small individually owned businesses can start for a few thousand dollars.  Franchisors also want to see some reserved cash and high liquid worth for a new franchisee.

2. Royalty Fee

Most of the franchisors charge about 5-10% of the total revenue for being a franchisee which could result in substantial loss of profit.

3. Fixed Products and Services

Franchisors want to make sure that all their locations look the same and carry the same products and services. They do not allow unapproved products and services.

4. Contractual Obligations

A typical franchise agreement is about 100 pages long and will probably have another hundred pages detailing how to run the franchise.  And so it can get very overwhelming. The agreement also binds you to the following:

  • Buying products from their approved vendors:  Most likely a franchisor is getting a kickback from those vendors and that results in additional cost to you.  You can probably source those same products from other vendors at a better price.
  • Franchisors want full transparency: They like to get information on each product sold at the business.  They also want to know the net profit, lease information, other expenses, etc., which may be remotely relevant to them.
  • Franchisors can also open additional locations in the vicinity of your location. This brings additional revenue to the franchisor. But you will have to work doubly hard to maintain your business as your catchment area reduces.

5. Conflict of Interest

Typically franchisors take royalty or franchise fee based on the revenue of the store and not the net profit.  It is possible that the franchisor is making enough money from the owner, but the owner is struggling to be profitable.  Franchisors can also add products and services that are profitable to the franchisor but not to the business owner.

6. Effect of Franchisor’s business decisions

Franchisors make decisions that are best for them.  This may include decisions to increase market share, provide more profits to shareholders or management of the company or to get kickbacks from other companies.  Sometimes franchisors compete with their own franchisees for products and services that can have an adverse effect on the franchisee’s net profit.

At the end of the day, it is important to weigh each factor carefully and decide how much risk you are willing to take.

If you’d like a quick summary of advantages and disadvantages of being a franchise owner, read this. For exploring advantages of owning a franchise in-depth, read this.

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