By Matthew Deutsch
Franchise systems are highly unique businesses that allow individual entrepreneurs to capitalize on the brand name and business systems developed by a third party. If you are new to entrepreneurship then starting a franchise or purchasing an existing one may be in your best benefit. Within this article, we are going to discuss both the benefits and the drawbacks of working with this type of business model.
One of the best benefits to buying a franchise is that many of the complex issues regarding accounting, business development, product development, and marketing are handled by the company that issues you the license to do business under their name. As such, you are primarily responsible for the day to day management of your individual location. An additional benefit to working within the confines of this system is that many companies encourage entrepreneurs to establish or acquire subsequent locations. There are many extremely successful business people that have built their fortunes by working exclusively with franchised businesses. Additionally, among well known businesses, the failure rates of franchises are extremely low compared to new business ventures.
However, one of the primary drawbacks to buying a franchise is that you will have very little control over your business. You are going to be required to sign a number of contracts that guide exactly how you will operate your franchised location. This contract is typically known as the Uniform Franchise Offering Circular. This document must be provided to you if you are considering developing a business with the assistance of a third party company. One of the other drawbacks to working with this type of business model is that you will not have very much control in regards to being able to establish new marketing campaigns without approval from the parent company.
You should be immediately aware of the relatively high fees that are associated with a franchised business. Typically, you will be required to pay an upfront licensing fee coupled with a recurring payment that is based on the revenues that you generate. These recurring fees are equal to 4% to 8% of the aggregate amount of revenue that your individual franchise generates. The parent company, from time to time, may audit your financial statements to ensure that they have received their contractually obligated payments.
As it relates to the financing of your franchise, banks and financial institutions are very happy to provide capital to these businesses. This is primarily due to the fact that establishing a new franchise or acquiring an existing one carries far fewer risks that creating a new business that does not have an existing market presence. Additionally, many franchise parent companies are able to assist with the financing process provided that you have the appropriate down payment that would be required by a third party lender.
In conclusion, if you are new to entrepreneurship then owning a franchise may be the best way for you to own a business. We strongly recommend that you seek the counsel of your certified public accountant or business adviser before entering into any binding agreement as it pertains to starting or acquiring this type of venture.