Is a Franchise For You?

A franchise business opportunity can be good alternative. They give you the benefit of a well thought out, tried and true business and ideas. They also have a great marketing plan and presence in place. So why doesn't everyone go this route?

The first problem is that most franchises I see people get involved in are retail oriented. This means you are very married to your business. If you're not there you don't make any money. Retail businesses can be alright but there are often better alternatives for some. You can learn more about your alternatives in my article, Selecting Profitable Business Ideas.

The second problem is that you must play by the franchiser's rules as it's not entirely your business and ideas at work. However, it is true that they help you to avoid the really big mistakes, but in a changing economy and in a changing market this limitation can make it difficult to adjust quickly. If you develop a better idea or new innovation you likely won't be pursuing it.

It's like you own your business and you don't. Having owned a franchise in the past I found this limitation very difficult to live with and eventually sold to someone else.

The third problem, and the worst, is that you will need to normally pay an upfront fee to acquire the franchise and some sort of ongoing fees while you own the business. These are called royalties and they cut significantly into your bottom line.

It is best if the franchise you own limits those royalties to just a few years. Many require you to pay them for as long as you own the business. You should avoid that type of franchise, if possible.

Some of the reasons for avoiding the franchise fees relate to your ability to create wealth. Many small businesses make a net income of say 10%. If your franchise fees are 5% per year you have given up half of your profits to use their name and marketing. Is it worth it? Sometimes it can be, but be very careful in your analysis.

An issue often ignored by people going into a franchise is that this profit you give up each year impacts the value of your business.

Many businesses are sold and valued at a multiple of their net income. If you give away half of your net income in franchise fees you also give up half of any potential value you would have created. This substantially limits your ability to create wealth, one of the reasons you decided to start a business.

When you start a business consider all factors including potential future value by doing an in depth analysis. Your business and ideas about the wealth you will create should include more than just the annual cash flow. It has to also include the sale value of the business.

by Steven Schlagel - June 21, 2009

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