The Disadvantages of Franchises

Buying a franchise gives you the right to use an established company's name and to sell its product or service. That firm's brand recognition and experience can be an enormous boon to new business owners.

Franchises do come with certain drawbacks, however, and some of them can be daunting.

• Franchises can be expensive. According to a 1996 study by the International Franchise Association (IFA), 20 percent of franchises had up-front costs of more than $250,000 and 54 percent required initial investments of more than $100,000. In addition, franchisers demand ongoing royalties, usually 3 percent to 6 percent of sales. You have to pay those royalties regardless of whether your business makes a profit.

• Franchisers may require you to follow their operations manuals to the letter. That rigidity ensures consistency among a firm's franchises, but it may curtail your independence and creativity, which might frustrate you if you've gone into business to be your own boss.

• Buying a franchise is like marrying someone you haven't known for very long. What if your new partner becomes cold and distant — or controlling? The fact is, franchisees enter a legally binding, long-term relationship: the average length of an initial franchise contract is 10.6 years, according to the IFA (although the term varies significantly between industries).

• The relative security offered by franchises may be exaggerated. One study showed that during a four-year period franchises were almost twice as likely to go out of business as independent small businesses that had been purchased (not started) by their owners.

More troubling still, some unethical franchisers mislead or take advantage of their franchisees. Watch out for these all-too-common franchise practices.

• Franchising as a pyramid scheme. Some companies try to make money by just collecting franchise fees, and won't spend the time or money necessary to help their existing franchises succeed in the long run. Moreover, such "pyramid franchisers" may go under if they stop selling new franchises, leaving you with a next-to-worthless business.

• Overcharging for supplies. Some franchisers may require you to buy supplies exclusively from them at inflated prices.

• Fees for unnecessary training. An unscrupulous franchiser might charge you for mandated — but useless — training.

• Misleading sales presentations. Some franchisers promise the moon in their pitches to prospective franchisees — then deliver something closer to green cheese.