Evaluating the Advantages and Disadvantages of Purchasing a Franchise

When we think about business owners, we often imagine an individual establishing a startup or building a business from the ground up. However, for many entrepreneurs and prospective business owners, buying a franchise offers an alternative option with many advantages.

In this blog, we will evaluate some of the advantages associated with franchise ownership as well as the potential downsides of buying a franchise.

Benefits of Owning a Franchise in Illinois

A franchise business is one in which the company owner grants licenses allowing other parties to sell its products, provide its services, and benefit from an already-established brand. McDonald’s, Chick-fil-A, The UPS Store, Jiffy Lube, and H&R Block are just some of the nearly 800,000 franchise establishments in the United States.

When you purchase a franchise, you are purchasing the right to use the parent company’s business strategies, intellectual property, and resources. This is a popular way for entrepreneurs to own a business while still receiving support from the franchisor.

The main advantage of buying a franchise is that the franchisee has access to the company’s existing customers. People who have already patronized the business in another location are much more likely to patronize a new franchise location of the company rather than try out a company they have never heard of before.

The franchisee also receives support and resources from the parent company, including employee training programs, business advisory services, and equipment. The franchisee will not need to develop a business formula from scratch, invent products or services, or formulate a marketing strategy. The parent company will provide all of this information for the franchisee. This makes owning a franchise a great opportunity for many first-time business owners.

Potential Downsides of Owning a Franchise Business

Although there are a multitude of advantages associated with owning a franchise, there are also downsides. When you purchase a franchise, you are required to comply with the parent company’s business model, strategies, policies, and procedures. There may be some wiggle room, but overall, you will be expected to follow a ready-made business plan. For individuals who want to sell their own unique products or services, or have substantial creative control of the business, a franchise may be too restrictive.

Another issue to consider is the cost of purchasing and maintaining a franchise. In addition to startup costs, franchises have ongoing fees, including franchise fees and royalty fees.

The monthly expenses associated with franchise fees, advertising fees, and other related costs are typically calculated as a percentage of the franchise’s gross revenue. This reduces the available revenue for the franchisee to allocate as they wish. 

Also, it is common for the franchisor to secure the site, lease it from the owner, and then sublet it to the buyer at a higher-than-market rate. Furthermore, if the franchisor decides to rebrand, they can require the franchisee to remodel their store. For example, McDonald’s mandated franchisees to undertake substantial remodeling when they transitioned from their golden arches.

Despite these considerations, starting a franchise can be worthwhile if the brand is popular and the new franchise is strategically located.

Contact a Naperville Business Law Attorney for Help

Our Naperville business lawyers can provide the legal guidance you need when starting a franchise. Call our office at 630-756-1160 for a confidential consultation.

Source:

https://www.investopedia.com/terms/f/franchise.asp: