Buying a franchise is a variation on buying a business. It can also be seen as an attractive alternative to launching your own business, saving you many of the start-up headaches. Establishing a franchise comes with its unique set of challenges too.
The advantages to buying a franchise include:
- Product or service is generally established and may have a national reputation
- Structured marketing program developed by professionals
- Sophisticated operation structure and training to virtually guarantee successful operations
- Established cost structure making it easier to manage the business
The disadvantages to buying a franchise include:
- Generally high cost of location acquisition
- Difficulty finding appropriate location
- Lack of operating flexibility
- Ongoing financial obligations
- Not all franchises offer the same degree of expertise in support
As with buying any business, before you enter the transaction you must define what value you’ll be able to add to the business so it will be worth substantially more when you sell it one day. That is, if you are able to sell it under the franchise agreement. If you are not able to sell it, you must look further down the road. Ask yourself whether the business will generate sufficient profits so when your franchise agreement expires you will have made enough money to retire on the capital.
Most franchises are organized in a way that sees the franchisee earn a reasonable living and return on capital. The logical question becomes: how can you increase your return on capital? Your freedom to operate or develop the business is often severely restricted by the franchise agreement. So what can you do to effectively increase profitability and earn a better return?
Often the smartest way to better returns is to own several franchises in the same chain. This allows you to spread the cost of management among several locations, which increases the average net income per location.
Acquiring a franchise is a complicated transaction and requires advisers who have experience in franchising. Generally the purchaser does not have a lot of negotiating room to change the terms of the deal. This means it is even more important to be aware of all your obligations to the franchisor prior to committing to the transaction.