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Pros and Cons of Buying a Franchise
If you have been thinking of starting a business or buying a business, it is likely you have also thought about buying a franchise. A franchise is a type of business where you pay a franchising fee and the owners or “franchisors,” allow you use their business logo, name, product, and business system. The initial fee sometimes can be large; but the initial fee can also be reasonable depending on the size of the franchise. If you are buying a franchise of a smaller, lesser known franchise, the upfront costs might be more manageable for those without a lot of liquid assets.
Here are few pros and cons of buying a franchise:
- Turn-Key: The franchisor already has a proven business model that has been successful and that is part of what you are buying. You do not have to come up with the name, the plan, the color scheme, or anything.
- Start Now!: Because the franchisor already has the business model, the product, etc., you can start running your business immediately. No prior experience needed. Franchisors almost always provide training.
- Built-in Customer Base: Customers already know the product, trust the business and the results. Thus, you already have a built-in customer base. You can start selling products or providing services immediately.
- Someone to Help: Your franchisor provides the business model but also helps set up the actual business and helps with the details. Sometimes it can be daunting to start a business. With a franchise, the franchisor and other franchisees offer a network for advice and support, and the support is ongoing.
- Someone Wants You to Succeed: Part of reason a franchisor provides training and ongoing support is because the franchisor wants you to succeed. It cannot be underestimated how important it is that someone else out there is rooting for your success.
- Higher Success Rate: Studies have shown that franchise businesses have a higher rate of success than other start-ups
- Financing is Easier: Because the franchisor already has the business model, the product, etc., third-party financing (like a bank) is easier. That is not to say that a loan is guaranteed, but the bank has a lot of information on the franchisor and the business model. Some franchisors also provided financing.
- Less Costly Than Starting From Scratch: Many franchises are expensive to buy (like a Subway or a McDonald’s franchise). Even so, buying a franchise is often much less expensive than starting your own business in the same industry.
- Franchisor Does the Advertising: Advertising is often the key to success, but very few new entrepreneurs know how to advertise effectively. Your franchisor will handle that for you.
- Detailed Franchise Agreement: When you buy a franchise, you will sign very detailed agreements and contracts. Having all the details spelled out can be very comforting for some new business owners.
- Detailed Franchise Agreement: As we just said, when you buy a franchise, you will sign detailed agreements and contracts. For some, all the contractual requirements can be limiting and not advantageous. The franchise agreement will spell out exactly how you run the business, restrictions on where you operate, the products you buy and sell, and on choice of vendors. Some find all the details too restricting.
- Franchisor Monitoring: The franchisor regularly and routinely monitors how you are running the business and for compliance with the franchising agreement. For some, this is annoying and smacks of micro-management.
- No Creativity: With all the restrictions, you will not be able to exercise your own creativity.
- Others Impact Your Success: Being in a network can be great for support, but also has a downside: the success of your franchise is dependent on the success of all the franchisees. That is out of your control.
- Operating Costs Might be Higher: Many franchisors require that franchisees buy specific product at specified prices. Often that price is higher than wholesale; this is how some franchisors make profit.
Contact San Diego Corporate Law
As can be seen, franchising has many pros and cons. Before taking the leap, it is probably best to seek the guidance of an experienced attorney like Michael J. Leonard, Esq., of San Diego Corporate Law.
Mr. Leonard can help you understand all elements of franchise laws in California, including the interplay of state and federal regulations. Franchising a business is deemed the offering and sale of securities. As such, franchises are subject to securities disclosures, registrations, and exemptions. There is also a California franchisee “bill of rights.” So, if you are thinking about buying a franchise, you need an attorney skilled in corporate law. If you want more information, contact Mr. Leonard by email or by calling (858) 483-9200.