For people who are considering starting their own business or perhaps expanding what they have, they might consider franchise options. Entrepreneurs will find both advantages and disadvantages in investing in an established brand image and falling under their franchise agreement. It’s a good idea to weigh the pros and cons before making a decision, as most people typically invest tens of thousands of dollars to get started.
What is the success rate of franchises? Is it worth investing in one? Investopedia reports it can cost anywhere from a few hundred dollars to $1 million to open a new franchised establishment. It very much depends on the industry one is entering and how the brand is established. The more an entrepreneur invests, the longer it may take to see a profit on the entry price.
While there are some downsides, such as following franchise rules and potentially higher prices, there are also many upsides to owning a franchise. Here are a few that can help you decide between buying from a brand or going it alone.
1. Less competition
Most franchise programs pay to set up in a specific location. When the parent company sells you a franchise, it is selling you rights to the territory. Most franchise programs limit it to one store per area, so you won’t be directly competing with anyone else for business.
Keep in mind, however, that you may face competition from independent landlords. For example, if you set up a Subway store in a mall, another store owner might set up shop next door offering subs from another brand or create their own.
2. Higher Success Rates
Industry experts report that approximately nine out of ten start-ups fail – not all in the first year. However, as a franchise owner, you have the full support of an already successful brand by your side. They have perfected marketing and various processes to ensure success.
Paying a premium to get into a franchise ensures they want to see you succeed. Keep in mind that most franchise programs also make a small percentage of your sales, so they have even more incentive to make sure they give you all the tools you need to thrive.
3. Better purchasing power
Imagine you are opening a business and trying to place a few small orders to stock your store shelves. Unfortunately, you’ll pay more than some of the big companies, and you may find it hard to compete with Amazon and Walmart.
When you invest in a franchise, you gain purchasing power. All franchisees work together to buy high volume at a cheaper price. It is very difficult for a small family restaurant to obtain supplies at the same price as a franchised establishment.
4. Entry into difficult industries
Some industries achieve higher profits and growth than others. For example, the trucking industry is expected to experience a 6% growth by 2026 because it is essential to move the goods from point A to point B.
However, entering the trucking industry requires specialized knowledge, access to equipment, and connections. Investing in a franchise helps ease some of the learning curve and costs and gives franchise owners a head start in a rapidly changing niche.
5. Embedded Customers
Finding new customers is half the battle in starting a new business. Franchise stores already tend to have a loyal customer base and you can get started from day one. For example, if you were to open a Duncan Donuts, there are people who travel miles just to grab a cup of their coffee or their favorite long john donut.
The International Franchise Association recently released its annual economic outlook report. The contribution of franchised establishments to the United States economy will reach approximately $501 billion per year ie a growth rate of approximately 5.7%.
While you still need to do some marketing to grow your business, it won’t take as long or as difficult to convince people to try your new business when they’re used to how other franchise locations operate.
6. Obtain financing more easily
Startups often struggle to get the funding they need to get things done. At a minimum, whether it’s a franchise or not, you’ll need a storefront or storage space, money for advertising, and enough to train and pay new employees. If you have inventory, you will also need money to buy goods.
Individuals may struggle to get enough money depending on their personal finances. However, the Small Business Administration maintains small business financing for franchises separate and therefore more readily available to new startups.
Should you invest in a franchise?
Deciding to invest in a franchise is not an easy decision. You will only pay for the right to the name and this may or may not be of great benefit to you. Do your research on other businesses in your area and how popular the brand is with consumers.
Calculate all the numbers, determine if you’ll get the help and mentorship you need to help your business thrive, and make the best choice for your business model.