Owning a Franchise - Pros and Cons
The Small Business Administration reports that 33% of all start-ups fail before two years. In comparison, a recent report by the U.S. Department of Commerce shows the failure rate of franchisees is only 4% to 5%. If you like those statistics and are considering a franchise, there are both upsides and downsides to owning a franchise.
The benefits of a franchise include getting a readymade business plan, guidance from the franchisor and other owners, plus – with many franchises - an established reputation. Additionally, most franchisors offer training.
However, be prepared to make significant investments (both time and money) to a franchise. According to the American Franchise Association (AFA), the average initial investment for a franchise is $400,000; the common range is $20,000 to $2 million, depending on the type of franchise. The AFA reports that it takes an average of three years to break even.
Additionally, the commitment to a franchise averages 8 to 10 years (some are as high as 20). Keep in mind, too, that buying in is usually easier than getting out; you will likely pay out of pocket to break a franchise contract. Sometimes, the franchisor will agree to buy back the franchise.
Conversely, when starting your own non-franchise business, you do not have the hurdles associated with the franchise. However, you may not have any name recognition, you may not know how to adequately train yourself and your staff, and you may not have other business owners in similar fields to guide your first steps.
If you don’t mind having procedures set up for you (since you will likely be limited in the style that you run your business), you have decent communication and basic accounting skills, and are a hard worker, a franchise may be right for you. Like any business, be sure to carefully read the Uniform Franchise Offering Circular (UFOC) and pass everything through your trusted business advisors (CPA, attorney, financial planner). The UFOC will describe in detail your responsibilities as a franchise owner (from annual training to percentage of profits towards advertising, etc.) and give you a better picture of what your bottom line may be.
About the author: Peter Stavropoulos is a business attorney whose practice emphasizes the representation of individuals and small to medium businesses, counseling clients on matters ranging from entity formation, employer/employee relations, contract draft and review, and civil litigation. To learn more, please visit www.petestavlaw.com or send an email to peter@petestavlaw.com.
