Should You Invest in a Franchise Opportunity

If you are considering investing in a franchise, you are considering a trade-off: The payment of up-front fees and ongoing fees for an established, profitable business model.

While franchising does not eliminate risk from starting a business, a good franchise can increase the chances of long-term success.

Should You Invest in a Franchise

A good franchise opportunity provides an established business model, and ongoing training and support that will help franchisees maintain quality standards, market themselves to customers, and operate profitable businesses. However, in order to gain those advantages a franchisor will incur significant up-front and ongoing costs, while also giving up the autonomy and independence that a lot of small business owners crave.

Before you invest in a franchise, you need to evaluate whether franchising is right for you and, if so, what franchise opportunities match your interest and skill.

  • Investment Requirements: Do you have the necessary capital to start a successful franchise location, including paying the required franchise fees, obtaining and building out the real estate, and maintaining business operations as you develop a client or customer base? The cost of acquiring a franchise can be substantial, and up-front costs are typically non-refundable.

  • Personality and Lifestyle: Are you prepared to be your own boss, or eager to be self-employed? Do you want to operate a business with multiple employees? Will the business support your desired lifestyle? If you will be working in the business, will you be happy performing those services?

  • Limits on Your Independence: Will you be happy operating a business that is constrained to a business model that is defined by the franchisor, as opposed to one in which you can pursue your independent interests?

  • Hard Work and Long Hours: Although a franchise may offer better work hours once it is established, any time you start a business you run the risk of having to work very hard, for very long hours. Are you and your family prepared to make that initial and perhaps ongoing commitment?

If owning a franchise seems like a good choice, the next step is to determine what service or industry interests you, and to explore franchises within your areas of interest.

Risks of Buying a Franchise

Before buying a franchise, consider the risks that you may absorb if you're not careful or, that in some cases, are inherent to the franchise model:

  • Competition with Other Franchisees: If you do not get a carefully defined and protected territory, you may find that the franchisor sells another franchise that opens near your location, reducing your customer base and profits.

  • High-Cost Supplies: While a franchisor has the potential to use bulk purchasing power to make supplies available to vendors at a reasonable cost, in the name of "quality control" some franchisors will nonetheless inflate the cost of products that you are required to use or require that you use specific higher-cost vendors that may return a fee or kickback to the franchisor.

  • High Fees: You may find yourself obligated not only to pay a significant franchise fee, but to pay additional fees for marketing and advertising. In some cases the franchise contract will not even require the franchisor to use advertising fees to promote the business, meaning that you pay additional fees but may get nothing in return.

  • Limits on Flexibility and Independence: Franchises are typically required to follow standards that limit their architecture and design, price, products and operations. While uniformity and consistency are part of what makes a franchise attractive to consumers, these restrictions will affect a franchisee's ability to innovate or to present additional products or services that may be attractive to local consumers.

  • Limits on Legal Remedies: A typical franchise contract will limit the franchisee's legal remedies in the event that the franchisee wants to bring a legal claim or file a lawsuit against the franchisor. Contracts typically waive certain protections under state and federal law, require that any litigation be filed in a jurisdiction convenient to the franchisor, may include choice of law clauses that require disputes to be resolved under the laws of a state that has fewer protections for franchisees, or requires that disputes go through a dispute resolution process prior to litigation or be resolved by arbitration.

  • Non-Competition Agreements: A franchisor will normally require that you agree not to compete with the franchised business during your relationship, and for a period of time after you end your relationship. You may realize that you could open a better and more successful business without paying franchise fees, but find yourself barred from doing so for a period of years after the termination of your relationship with the franchisor.

  • Risk of Termination: A franchise contract will often allow the franchisor to terminate your contract upon slight cause, such as the late payment of a franchise fee or a claim that you failed to follow required operating procedures.

Although you should not assume that a franchisor is going to try to cheat you, you need to be aware that your substantial investment in a franchise could be subject to being lost or significantly diminished in value as a result of franchisor whims and decisions that are completely outside of your control.

Choosing Between Franchise Opportunities

If you believe that owning a franchise is the right choice for you, and you have identified industries that match your personality and goals, odds are you will be looking at several different franchise opportunities.

Factors that will help you choose the best option include:

  • Industry Trends: Does the franchisor have a business model that is likely to survive changes in the industry, avoiding dependency on fads and evolving as necessary with the market and consumer tastes?

  • Business Model: Does the franchisor provide a strong but reproducible business model that you can learn and implement?

  • Business Systems: Does the franchisor have established, reproducible systems that will help get a business started, maintain profitability, help with employee training, and ensure quality and consistency?

  • Total Fees: What is the annual franchise fee? What royalties are required? Are additional marketing fees required? Are there any other required fees? If you end your franchise contract early, what is the cancellation fee?

  • Strength of Brand and Marketing: Are consumers going to be familiar with the franchise brand? Is the brand associated with quality? Has the franchisor implemented a solid, successful marketing plan?

  • Training: Does the franchisor have an established training center at which it provides training for new franchisees? Does it provide ongoing training and support for franchisees?

  • Required Workload: Will the franchise require your personal involvement, six or seven days a week, from open to close? Will it allow you to work a five day, forty hour work week? Will it require you to act as an owner-manager, or will it allow you to open and manage multiple locations?

  • Peer Support: Will you be able to associate, connect, and network with other franchisees to ask questions, and to share tips and experience?

  • Real Estate Issues: What assistance does the franchisor provide with site selection, lease negotiation, and build-out?

  • Selectivity: Is the franchisor careful in its selection of partners, or is it happy to grant a franchise to anybody who can write a large enough check? Has it built its own marketing operation, or is it working through brokers who may be more concerned about earning a commission than making good matches between the franchisor and potential franchisees?

  • Bulk Purchases: Does the franchisor take advantage of its market position in order to negotiate bulk purchases, with part or all of the savings passed along to the franchisee?

  • Required Purchases: Are you required to obtain supplies from the franchisor and, if so, are the supplies sold to franchisees at a reasonable price?

  • Franchise Territory: Is your protected territory of sufficient size to protect you from losing customers to other franchisees? Does your territory contain the correct number and demographic of potential customers to provide an opportunity for success?

  • Financial Information: Is the franchisor providing solid financial information that will help you assess your likelihood for success and profit, or is the franchisor focusing on averages and gross profits without giving you a genuine picture of how the franchise is likely to perform?

  • Financing: Does the franchisor offer assistance with franchisee financing, perhaps through referrals to lenders who are familiar with the franchise and predisposed to lend on favorable terms?

  • Non-Competition Agreements: If you end your relationship with the franchisor, are you prohibited from opening a competing business? If so, what time and territorial restrictions apply to the non-compete agreement?

  • Grounds for Termination: Under what circumstances can the franchisor terminate your franchise, and what recourse do you have in the event of an unfair termination?

Certainly, there's a lot to consider before you invest in a franchise, but your exercise of due diligence will help ensure that you are happy with your choice of franchise and that your investment will be profitable.

Copyright © 2016 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on May 7, 2018.