10 Reasons to Purchase a Franchise
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It's too risky. I don't have the capital. People might not buy my product. I don't know the first thing about running a business. Yes, excuses proliferate. And with the economy the way it's been for the last year, forget about it.
That's why it's nice to have help, and there's probably no bigger source for startup help than a well-chosen franchisor. It's why people look to franchising as a vehicle to drive their lifestyle and their income in the right direction. As a result, some are dipping in to their pensions and 401(k)s, withdrawing their faith in the stock market, and investing in a more manageable and profitable future. The allure of starting a franchise business that is packaged and ready to go versus the uncertainty of an independent startup is worth its weight in gold. Not convinced yet? Check out our top 10 reasons why franchises are a worthwhile investment.
- You are buying a proven formula.
"It's all about systems," says Mike Johnston, co-owner of Savory Spice Shop, a new boutique franchise concept out of Denver that offers more than 400 freshly ground spices and seasonings. When you buy into a proven franchise concept, you avoid many of the major hurdles new startups face because the franchisor has already worked out the kinks and laid a solid foundation. A good franchisor will have everything systemized and ready for you--a business paint-by-numbers, if you will--from marketing and branding to site selection and approved vendors. On the other hand, Johnston challenges you to think about what it would take (and how long) to start your own business that earns an immediate income stream.
- Larger franchise companies offer in-house lending or assistance attaining financing.
"Due to tightening lending practices, many franchise companies these days are providing in-house financing for part or all of the total startup investment," says Rob Goggins, vice president of franchise development for Great Clips. This eliminates unnecessary time seeking approval from third-party lenders on things like franchise agreements and business pro forma; rather, the focus is on you and what you bring to the table as a franchisee. Although Great Clips doesn't offer in-house lending, Goggins says they have long-term partnerships with several strategic lenders, one of which has financed more than 1,000 salons.
- A franchise provides a built-in support system.
If you need help negotiating the terms of a lease, if your POS system is acting up again, or if you want to offer a special promotion and need advertising and design assistance, the franchise is there to help. Equally important, Goggins says, is the relationship between franchisees and the support they offer each other. "Good franchisors understand that there are exponential improvements that take place when franchisees are well-connected and sharing best practices."
- Who shouldn't buy?
While franchise concepts are great for many entrepreneurs, they aren't great fits for everyone. Here are a couple of reasons you may not want to buy a franchise.
You are truly an entrepreneur.
If you can't imagine taking direction from someone else and following a business formula, then you're not the right fit for a franchise. A successful franchisee follows the lead of a franchisor and considers the operations manual a religion. "I'm an entrepreneur and I would be a terrible potential franchisee," admits Mike Johnston, co-owner of Savory Spice Shop, a new boutique franchise concept out of Denver. "It's not a bad thing, it's just that franchising isn't a match for true entrepreneurs."
You want to change the system.
"New franchisees are encouraged to open [their business], execute the system and reach the cash-flow positive point as quickly as possible. Until that time comes, a new franchisee should not be overly concerned with sharing new ideas with the franchisor," says Rob Goggins, vice president of franchise development for Great Clips. "Franchisors are receptive to such ideas but generally are more receptive when those ideas come from successful, experienced franchisees."
With competitive rates and longer terms, SBA loans are a smart way to fund your franchise unit,--not to mention there are no points, no balloon payments and no pre-payment penalties. According to SCORE, a nonprofit resource partner of the SBA, franchise loan applications are looked upon more favorably by the SBA than loan applications for independent startups because franchises are turnkey operations. Simply, they are a safer bet. The SBA also has a resource called Franchise Registry. It is a preapproved list of franchises that the SBA has already reviewed, which allows for a more streamlined loan process for potential franchisees.
- You can be your own boss (almost).
You call the shots, you manage the schedule, you run the show--just understand there's a pecking order. "It's not the same as being an entrepreneur, but it's the next best thing," Johnston says, explaining that a franchisee owns an individual unit but has also agreed to follow a formula put in place by the franchisor. "If you choose to follow the business system and use the support systems in place, your chances of being your own boss for a longer time will increase."
- Some low-cost franchises have strong ROI.
When Monica and Jeremy Sartain thought about buying a franchise, they knew they wanted to be in the food business, with a low entry cost and daytime operating hours. Jeremy had years of experience in the food industry but always worked for someone else. "We wanted to do something that could use his particular talents, where his hard work and effort would be a direct benefit to us," Monica says. That's when they found GiGi's Cupcakes, a Nashville-based boutique cupcake concept that is causing a wave of interest throughout the country. "With startup costs lower than typical food franchises, low food and labor costs, and high margins, our break-even point is significantly reduced," says Alan Thompson, president of GiGi's Franchising. A lot of low-cost franchises might promise the world, but it's important to know if they will deliver. Thompson recommends going and talking to franchisees about their experiences with the franchise and what their margins really look like.
- In a down economy, the buy-in prices are lower.
"Investing in a business in a down economy is like buying a BMW for the price of a Ford," says Harry Mathur, interim managing director of Northwestern Mutual in Lombard, Illinois. During a recession, cash is limited even among the best businesses, he explains. Franchisors that want to build capital to grow or simply to stay afloat are actually discounting their franchise fees, knowing that when the market turns they will flourish.
- Name recognition is what consumers look for, especially in a recession.
"Consumers generally frequent those businesses with which they are most familiar and comfortable," Goggins says. Having instant access to a recognized brand provides a built-in security blanket, and during a recession consumers are more inclined to go with what they know. It's all about name recognition and consistency, Mathur explains. Now more than ever consumers want the safety and comfort of a familiar brand.
- Baby boomers who can't retire can be their own bosses and see solid returns on investment.
It's no secret many boomers took a devastating hit in the market. For some, retirement has been postponed, for others it has been inevitably canceled. That's why so many once-hopeful retirees-to-be are looking to franchises as an opportunity for a new future, one that allows the flexibility of being your own boss and the support of a proven business that--let's face it--can deliver better ROI than any 401(k). ?
- The chance of success is much higher.
Bottom line: A franchise is more likely to succeed than an independent startup, and the security of investing in a proven concept is worth its weight in gold. "With a franchise, the chances of success are dramatically increased because you have the support of the system," Thompson says. "The franchisor has already taken most of the risk. That's what you're really paying for."
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