Buying a Franchise – Do It The Right Way

July 06, 2008

Creating your own business is one of the best investments you could do long term. A good business can sustain tough market times much better than the financial assets like stocks and mutual funds. The business can bring higher income than the investments in financial instruments or real estate.

Buying franchise image
Photo by Sin Agua at Flickr

Unfortunately building your own business is much harder than investing in ready assets. Building a business may require a lot of time, passion, knowledge and startup funds. Finally, the chances for a new business to fail and end up as 100% loss are fairly big. And wait, building a business requires hard work – exactly the thing most people want to avoid.


Is Buying a Franchise Business The Way To Solve These Problems?

The franchise business model have some great advantages which may make it attractive option if you are not passionate about building a business from scratch.

  • High success rate. A quick search online shows that most franchise businesses declare a success rate of 90% or more. This means only 10% of the franchise startups go bankrupt in the first few years of operation. Compared to the failure rate of the “normal” businesses this is several times better.
  • There are less things to go wrong. Buying a franchise is good for you if you don’t have much experience in building your own business. Since you are receiving instructions and guidance from the franchise provider, there are much less things you need to worry about.
  • You save a lot on advertising. Most franchise chains advertise their products and services worldwide. By using their brands you don’t need to work that much on getting known and recognized.

Of course, buying a franchise has its disadvantages – the main one is usually the high startup cost and royalty fees. Compared to what you get in exchange however this is not a big concern if you buy a good franchise. The startup costs to build a business from scratch can be much higher if you have to invest in branding yourself.

How Can You Invest In A Franchise Successfully?

The first thing to do before buying a franchise is to find one that suits you. A franchise is only as good as it can fit your specific personal requirements and geographical characteristics. A Subway franchise may be great for many, but it may not work that well if physically situated at the corner behind McDonalds and KFC.

Pick a franchise in a business niche that you understand or at least would like to learn more about. A big share of the franchises are in the fast food/drinks niche, but not everyone wants or know how to manage a fast food business. If you are an architect or engineer you may do better with a real estate related franchise.

As the Web grows, there are many web based franchise opportunities offered now. Some of them are quite tempting because there are no high costs of starting one. But because of that and the global economy of the web (there are no regional limits to any franchiser except eventually the language) there is too much competition in these franchise models. Besides that the web offers very low barrier to everyone to run a business and offer franchising so a lot of these opportunities are of low quality or plain scams.

Once you carefully select the franchise, you must have the funds for buying it and for buying/renting any real estate and equipment that’s required. The good news is that banks and other credit institutions are usually more inclined to give loans to franchisers rather than to plain business startups. So, financing a franchise may not be as hard as it may look.

Although franchising gives you less chance to be creative and less in it depends on you, don’t expect the business to run on its own. If you want to have long term success you need to learn about your new business all the time, to experiment on local advertising, service improvement and customer relations. As long as you are allowed by the franchise provider to do any improvements, experiment with doing them so you can stand out compared to the other franchisers in your area.

Limiting The Risks

Ten percents risk of failure is not a small number especially if your business unit turns out to be within these 10%. If your location is good, if you carefully select a proven franchise, and if you have ensured the market in your area is not over saturated, you are already on the right way. But there are few more things you can do to reduce the risk of failure:

  • Rent, do not buy. Long term renting will reduce your profits. But at least in the beginning you’d better avoid buying property and expensive equipment for your new business.
  • Choose the best proven franchise in your niche. Do you prefer 5% chance to lose $50,000 or 10% chance to lose $120,000? I would choose the latter. Even if the proven franchise is more expensive than a less known one, you are risking less in general with the former.
  • Research online. A well known franchise business will have a lot of franchisers worldwide. Research online forums and communities for other opinions, tips and advice from people who are working with your franchise provider. Many will complain about their failure online – carefully examine what kind of problems they share and see how you can avoid them.

Buying a franchise is a beaten track for these who want to start a business but don’t have much experience and don’t want to take much risks. It’s not always the best option – you could start a business from scratch for less funds, you can have more freedom and can grow more if you go by your own. Franchising is basically a deal in which you trade freedom for safety – it’s like having a job, but is one step closer to the freedom of risk.


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Jose L. Aguilar- Author

Being able to Invest & Trade on your own is the most amazing road to financial independence & optional retirement. I was very fortunate to have amazing mentors and read many amazing authors, I hope you enjoy my articles & books suggestions which are made with the intent to share my experiences as simple as possible.

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By Jose L. Aguilar

Being able to Invest & Trade on your own is the most amazing road to financial independence & optional retirement. I was very fortunate to have amazing mentors and read many amazing authors, I hope you enjoy my articles & books suggestions which are made with the intent to share my experiences as simple as possible.

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  1. Kevin D. Johnson

    Major franchises are likely going to cost a lot more than any business startup as you note, and it might also be smart to remember that when you start your own business no one says you have to go big guns from the very beginning. Sometimes the best thing to do is start very small and let the business grow naturally.

    A franchise is no guarantee to success in business. There is always risk and with the cash outlay it requires (either through borrowing or just laying it down from assets up front) I’m not sure you can make the full case that the risk still equals the reward or that franchising is a safe option than starting your own business. Not after we see 600 Starbucks stores closing in one sweep. When the big guys can’t do it in this economy, you may want to think twice about whether you think you’ll be able to.

    My two cents of course–not that starting a small business is easy either but at least you have control and it is something that is really yours. Not so with a franchise. I guess what I’m saying is that there is no easy risk-free way to owning a successful business and it wouldn’t be accurate to say that it is a *safe* way to own your own business. The risks are just as high but not always the same as any startup all things considered.

    That shouldn’t discourage folks from starting a business…only that you should count the cost before you do regardless as to what you decide to do.

  2. admin

    Wow, that’s a great comment, Kevin, thanks for the input. The stats are still in favor of the franchising. but as you said, there are many hidden costs.

  3. Kevin D. Johnson

    I’m glad you liked the comment–just thought maybe a little balance on the topic would help. I really like your blog…I’ll keep reading!

  4. Emilia

    Well written article.

  5. profitable franchise business opportunity

    Within the current economic scenario, you will find franchises doing business everywhere. It is only natural to become attracted by the huge business potential. With so many options out there, spotting and buying the right franchise business can be quite difficult.

    So what makes the right business franchise opportunity? While it is important to pick a brand that has wide visibility and is a pioneer in its field, it is equally crucial to put your money into something that matches your skill level, fits with your lifestyle, and rightly complements your business goals.

    After a self evaluation, it is time to chalk out a business strategy. The strategy as a whole can be broken down into three separate parts: an entry strategy, long-term planning, and an exit policy. Finding the right business franchise opportunity falls into the category of entry strategy. This strategy also includes the buying of the franchise and starting the business.


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