Buying a franchise is a great way to start your own business, but before you decide to invest, it’s essential to do your due diligence. If you’re considering purchasing a franchise, we’ve outlined some of the pros and cons below, as well as how the Oregon Small Business Development Center (SBDC) can assist you.
What Is a Franchise?
The International Franchise Association defines a franchise as a “method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.”
The franchisor allows the franchisee access to their brand’s proprietary knowledge, processes, and trademarks. So they are essentially the same company, but the franchisee runs their business independently.
As the franchisor lends its brand name to different franchises in various locations, the franchisor can rapidly expand the business. They do not need to raise the capital to open new stores or hire employees at each location. The franchisee handles everything at its own store location, while the franchisor can focus its efforts on creating great products, processes, and customer experiences.
Let’s explore the pros and cons for the franchisee, also referred to as the franchise owner.
The Pros of Owning a Franchise
- The concept has proved successful: When buying a franchise, you are investing in a business that has already been successful. You’ll also be able to review data and insights from other franchisees who have experience operating the same business.
- Established brand awareness: Consumers trust brands they are familiar with. For instance, if you’re traveling and want to grab coffee, you know exactly what you’ll get from a Starbucks location.
- Ability to enter a new industry: You can buy a franchise and enter into a whole new industry without going back to school. You can learn everything you need to know from the franchisor.
- Ongoing support: As a franchise owner, you’ll have continuous training and support from the franchisor. Some even offer call centers and administrative support.
- Corporate partnerships: Franchisors negotiate contracts and create strategic partnerships with other businesses, which can help franchisees become approved vendors or take advantage of discounts on inventory and equipment.
- Lower risk: While there’s no guarantee that the franchisee’s business will be successful, just being part of a franchise system lowers the risk of failure. It comes with a loyal customer following and a proven business system already in place.
- Being part of a network: Many franchisors host conferences and mastermind groups for their franchisees to come together to collaborate and share best practices.
The Cons of Owning a Franchise
- Franchise fees: According to the Federal Trade Commission, to be considered a franchise, the franchisor must charge an initial franchise fee. This fee gives the franchisee the right to use the company name for a specific number of years and assistance in starting the business. This fee varies but can average $35,000. It’s a major investment, but remember that you’re paying for all the hard work the franchisor put in to grow the brand.
- Royalties: Most ongoing franchise royalties are based on a percentage of the franchise’s revenue, and typically range from 4% to 12%. Some franchises may charge fixed royalty fees. These cover ongoing support and other resources. Some franchisors may charge an additional fee for marketing/advertising.
- There’s less creative control: Franchisees need to follow the system provided by the franchisor. For instance, fast food franchise owners cannot change menu items or create their own advertising campaigns.
- Negative PR can impact your business: If there was a horrible experience at another location, or there was a corporate mishap, it can negatively impact your business. Even if you’ve done everything right, bad press can hurt the entire brand.
Is a Franchise a Good Idea as a Startup?
There will always be trade-offs in starting any type of business, and a franchise is no different. Some prospective franchisees like knowing that a franchise is a business model that’s been proven to work. For other business owners, the lack of creativity in the system can be constricting. But that depends on the franchise; when exploring any franchise opportunity, make sure you completely understand all the brand’s benefits and limitations.
This is where the Oregon SBDC can help, as we can assist you in exploring the advantages and disadvantages of buying into a franchise. You can also request a free consultation from Frannet to help determine if franchise ownership is right for you.
Turning a Small Business into a Franchise
Have you heard of Dutch Bros.? In 1992, Dane and Travis Boersma started a pushcart selling coffee in downtown Grants Pass. When they decided to grow their business, they enrolled in a program offered by their local Oregon SBDC and learned how to set goals, hire employees, and turn their coffee business into a franchise.
Today, Dutch Bros. is one of the Oregon SBDC’s greatest success stories. After raising more than $400 million in an IPO in 2021, Dutch Bros. is now a publicly traded company (NYSE: BROS). While they no longer offer the option to franchise, Dutch Bros. operates more than 470 locations in 11 states, employs 13,000 workers, and continues to expand its brand. To learn more about their story and business journey, click here.
The Oregon SBDC Network is committed to building Oregon’s best businesses. Our 20 regional Centers and Global Trade Center assist small businesses throughout Oregon with advising, classes, and access to the resources they need to be successful. Each center is backed by our statewide support network, helping small businesses access the proper assistance wherever they are in Oregon.
If you have any questions, connect with your local SBDC at OregonSBDC.org.