Deciding Whether to Franchise

Before you consider whether you're cut out to become a franchisee, you need to understand some of the advantages and disadvantages of franchise ownership.

Advantages of franchise ownership

Your chance of success in franchising can only be as strong as the franchise you select. Mature, well-operated franchise systems generally possess the following traits.

Overall competitive benefits

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The public has become accustomed to a certain level of quality and consistency from branded locations. Whether a company's product is superior or mediocre, if its locations are successful, the secret for its success will likely be in its consistency.

One of the secrets of being a good businessperson is not accepting a poll of one: Just because you find a product or service outstanding or mediocre doesn't mean the rest of the world does.

Regardless of where they are, consumers believe they understand the level of quality they will receive when they shop at a branded location. This often gives new franchisees an established customer base. Branding makes it easier to compete with the well-established, independent operators and even against other franchised and nonfranchised chains. The advantage of brand recognition also extends to national accounts. They look at a system that has a network of locations and trust that each will operate at the same level of consistency and commitment. That type of system can service their needs wherever the franchise has a location.

Pre-opening benefits

Although the cost of entrance into a franchise system includes a franchise fee, which is often cited as a disadvantage, the franchisee benefits from, among other things, training, operations manuals, site selection tools, store design, construction programs, and reduced cost of equipment. Additionally, franchisees have their franchisor as a seasoned partner of whom they can ask questions, and they have a network of other franchisees in the system who can also be of assistance.

Ongoing benefits

In exchange for paying an ongoing royalty and other payments, franchisees benefit from periodic training programs and home office and field assistance. Often, through the franchise system's buying cooperatives, franchisees pay less for goods than their independent competitors do.

Franchisees benefit from the purchasing power that comes from joining with others. They benefit from professionally designed point-of-sale marketing material, advertising, grand opening programs, and other marketing materials that independents could never afford. Franchise systems can also afford to modernize through ongoing research and development and by test marketing new products and operating systems.

Each franchisee's spending power is combined with the spending power of all the other franchisees in the local market and in the rest of the system. This combined spending power, on advertising for example, often enables franchises to not only dominate local markets and the established independents but also compete effectively against large, established chains.

Disadvantages for franchisees

Franchising is not right for every person, and it is important that you understand some of the disadvantages in a franchise relationship:

• Loss of independence: For some people, one of the most serious disadvantages to becoming a franchisee is loss of independence. Franchise systems are structured in such a way that the franchisor sets many of the rules; the franchisee is required to operate the business according to the franchisor's manuals and procedures.

• Over-dependence: Franchising's loss of independence, if taken to extremes, leads to a further disadvantage: over-dependence on the franchise system. Franchising succeeds when financial and emotional risk motivate franchisees. When they rely totally on the system for their success, their over-dependence can cause problems.

• Other franchisees: The principal reason for the success of franchising is the public's perception of quality and consistency throughout the system. When the public receives great service at one location, the assumption is that the system has great service. This is also one of the potential major weaknesses of franchising. Franchisees are not only judged by their performance, they are judged by the performance of other franchisees. Poorly performing fellow franchisees or company- owned locations damage a franchisee's business even where they do not share the same market.

• Income expectations: Some franchisees have unrealistic expectations about the income that they are going to earn. If their expectations are unrealistic, they will regret their investment in dollars, time, and effort and may become a negative influence on the system.

• Franchising inelasticity: Franchise systems are bound together through legal agreements between franchisors and franchisees. Often, these agreements contain restrictions that potentially impact the franchisor's ability to make strategic decisions. For example, if a non-franchisor finds a location perfect for a new store, it is free to buy it. In a franchise system, the franchisor must first look to the legal agreements between itself and the franchisees in the market. If the franchisor has granted the franchisees protected territories, and the new location is in one of those territories, then the franchisor loses that market opportunity.

The restrictions that can make franchising successful can be seen as disadvantages to some franchisees. These can include restrictions on product and services they are allowed to offer, limitations on size and exclusivity of their territory, the possibility of termination for failure to follow the system, the cost of transfer and renewal, and restrictions on independent marketing. Also, the added costs for royalties, advertising, additional training, and other services potentially reduce a franchisee's earnings.

Franchisees execute the system the franchisor provides. Great franchisees take that system and improve it: by providing better than the minimum customer service required; by hiring quality people and providing them with training; and by creating an atmosphere in their business that is palpably better than expected by their staff, their customers, their vendors, and the franchisor. Great franchisees enhance the basic system by being "entrepreneur lites."