There are many ways to go into business. How to start your business is a huge decision, and choosing the perfect business model will have a major impact on how things will go. One of the options available to you is running a franchise. When deciding if it’s right for you, as with any significant decision, you must understand all the implications of which option you choose.
A franchise business model is a business system where an established company offers the rights to open and operate a new location with its brand name, products, and services. The franchisee (the person who owns the new location) pays royalties to the franchisor (the brand owner) to use their trademarks, logos, recipes, and other proprietary information.
Franchisees must meet certain specifications to operate a franchise location, such as having a certain amount of capital or meeting minimum experience requirements. They also must agree to comply with certain standards set by the franchisor.
If you’re thinking about starting your own business but don’t have the experience or resources to create a customized business plan from scratch, a franchise may be a good option for you. You can learn more about how you can start here.
But before you dive right into starting a franchise, first weigh the pros and cons of the franchise business model.
Pros and Cons of a Franchise Business Model
Pros of a Franchise Business Model
It offers an established business plan.
An established business plan allows owners to get their business up and running more quickly than a traditional startup would. If you don’t know how best to run your own business, the franchisor also provides training on how to run the new business effectively. This is an invaluable resource for new entrepreneurs who don’t have experience yet. Take the time to compare an established business plan with a startup business plan. The comparison can aid in your decision.
It’s less trouble.
A franchise can also be less troublesome than starting as an independent entrepreneur because of its established reputation and proven marketability. If multiple locations are already operating successfully in one place, then the chances are good that your establishment will do well, too!
It’s easier to finance.
Having a third-party stakeholder involved in your venture makes it easier for you to secure financing through banks or other lenders. They are more likely to trust someone that experts have vetted than someone with no experience in the field. You will also benefit from using resources that have already been purchased, avoiding duplicated fixed costs, such as marketing materials or employee training programs, which the franchisor may have already purchased.
Cons of a Franchise Business Model
While a franchise model can be an effective way to grow your business and increase revenue, it’s not without disadvantages.
You’ll have to finance high start-up costs.
One of the most significant disadvantages is that you may need to pay high startup costs of up to $5MM. However, some franchises are under $25,000, and you can read more about them here. You’ll likely need to buy into an existing system, which could require hefty initial investments in advertising and other marketing materials. You also have to consider how much marketing support you’ll receive from your franchisor and whether you’ll be responsible for ensuring that your stores are staffed with highly trained employees who know how to maintain standards set by the company.
You’ll have to pay for any advertising and marketing costs, not the franchisor.
Franchisees may be required to pay for advertising or promotional materials produced by the franchisor. This can add up fast over time if you’re running multiple locations (in some cases, each franchisee will even pay a percentage of their profits back). These types of fees aren’t necessarily unusual—in fact, they’re pretty standard among hospitality businesses such as hotels or restaurants—but prospective franchise owners must keep those costs in mind before taking out loans or incurring debt on behalf of their business.
You may incur royalty fees for using logos.
Franchisees may also be required to pay royalty fees to use their franchisor’s name and logo in marketing materials or signage. These costs vary based on the size of the franchisee’s operation. Some small businesses charge nothing while others charge thousands per year, depending on how much they sell through their locations each month. Once you’ve paid these initial fees, however, you will receive ongoing support from your parent company (such as training and support) that helps ensure the success of your business.
Investing in a franchise can be a great way to start your own business with less risk than starting from scratch. However, whether it’s the best option for you depends on many factors, such as your tastes, finances, and goals.
There are many types of business models to consider when launching a business. If you are considering opening a franchise, the key is to do your research and find an option that fits your needs. The franchise business model offers flexibility as time goes on. If one market segment doesn’t work, try another one instead! It’s best to start small and then slowly expand by investing wisely before expanding into other areas.