Owning a franchise helps entrepreneurs fast track their goal of self-employment. Compared to starting your own company, which involves researching your market, developing a product, and building brand recognition and customer relations, starting a franchise comes as a relatively simpler way to establish an entrepreneur status. That being said, franchise ownership still comes with its fair share of hurdles and pitfalls. Here are five you should be aware of:
A Share of Your Profits Go To Your Franchiser
Owning a franchise means that you automatically surrender a portion of your revenue to your franchisor in the form of royalty payments and marketing fees. The latter is usually a variable fee that’s based on your monthly revenue. Add these recurring payments to the initial upfront franchise fee and you’re looking at a sizable sum. To avoid high franchise fees that could affect your long-term operations and disable you from ever recouping your capital, read the fine print before putting your signature on any legally binding documents.
You May Be Forced To Operate Under Stringent Rules and Policies
People start a business mainly to gain the freedom and independence to call the shots. Depending on the franchise, however, you may be bound to certain rules that restrict your ability to make executive decisions. Most corporations enforce stringent operating guidelines to maintain brand integrity and quality standards. These guidelines must be followed by their franchisees lest they incur fees and penalties. Again, the best way to avoid any future conflict with your franchiser is to read the fine print and, if possible, renegotiate for better terms and conditions with regards to control over day-to-day operations.
You Are in a Highly Saturated Market
Last year, according to Statista, there were close to 800,000 franchise establishments in the US alone. Now, you won’t actually have to compete with that many franchisees since that total number is comprised of different brands, but even a fraction of that 800,000 active franchise businesses can make it a fiercely competitive marketplace. With dozens of franchisees fighting for customers in a small radius, earning enough to turn a profit at the end of the month seems an impossibility. To avoid this pitfall, conduct due diligence on the location that you’re planning to franchise in as well as the brand that you’re planning to franchise.
You Are Left Without Any Ongoing Support
Although royalty charges will never disappear throughout the lifetime of the franchise agreement, your franchisor may pull the plug on any ongoing support that they initially provided you with. This may include employee training programs, accounting and legal consulting, marketing, etc. This is a common pitfall when buying into a lesser-known brand. While these types of franchises are inexpensive to buy into, you do lose out on the invaluable support that many corporate brands provide their franchisees with. To avoid this pitfall, naturally, you’d want to pick a franchise brand that is well-established. Currently, the most profitable franchises are also in the food sector, such as McDonald’s, KFC, and Taco Bell. These brands produce average sales between $900,000 to $2.5 million.
You Have To Go Through an Application Process
Owning a franchise partly bears a resemblance to applying for a job, which can be a huge turn-off for entrepreneurs who don’t want to answer to anyone. Once you find a franchise that you’d like to buy into, you’ll have to contact the franchiser. Some franchisers may require you to pass an extensive questionnaire or application exam. Once you pass, there is an interview stage between you and a franchiser representative. They’ll continue to screen you to see if you are a good fit for their brand. If you make it to the end of the application process, you are then offered a contract to become a franchisee. Unfortunately, the application process is unavoidable since it’s how you can legally go about franchising for a corporation. That being said, you can avoid a drawn-out application process by making sure you fill out and prepare all required documents and forms.
Keep in mind that there are pitfalls to every commercial endeavour, regardless of type, structure, and industry. Knowing how to avoid these inherent pitfalls allows you to run your franchise unencumbered.