Pros/Cons of Franchises?
May 10, 2022
by a searcher from The University of Michigan - Stephen M. Ross School of Business in Cincinnati, OH, USA
I'm very interested in what I call "blue collar services" companies, things like the very popular lawn care, HVAC, roofing etc all the way down to dryer vent clean outs and specialty construction. I hadn't thought to pursue a company that was part of a regional/national franchise, but I've recently come across multiple franchise opportunities that seem relatively attractive.
Can anyone share their good/bad experiences, things to consider or watch out for, how to evaluate a franchise business compared to a standalone business?
Thanks for any insight.
from University of Southern California in North Palm Beach, FL, USA
Require proof of franchises’ “competitive advantage.” What exactly is the competitive advantage a franchisor has over other franchisors, and that its franchisees have over competing businesses? Test this by comparing the improvement in performance that exists between the franchise you are considering against other franchises and independent businesses. Items to test include: Market share; lower costs; higher profit; fewer failures; barriers to entry; a business that is more marketable when it’s time to sell it (with the franchisor’s conditions and permission, of course).
Compare franchises to non-franchises. Buying an established non-franchise business might provide most of the perceived benefits that franchisors tout and not burden the business and its owner with franchising’s restrictions, costs and ongoing fees. It’s advisable to include established, independent companies in your search. In deciding whether to become a franchisee or to operate an independent business, compare what the seller of an independent business gives the buyer, during the buyer’s transition into the company, to a what franchisors offer their franchisees. • Compare the cost to hire employees or advisors to provide the assistance and expertise franchisors furnish. • • • Compare the cost of inventory your franchise will purchase from the franchisor (or its approved vendors) to prices an independent business pays. • • • The seller of a business and its employees and advisors train the buyer during the buyer’s transition into the company. You’re not starting from scratch. • • • The seller of a business, for a limited amount of time, and the business’ employees and advisors for a longer time, work for and assist the buyer. • • • There is no evidence, which can be objectively verified, that a national affiliation makes a franchisee any more profitable or marketable (when it’s time to sell the business) than a non-franchise business. It may actually be more difficult to sell a franchise for as high a multiple of earnings as an independent business. • • • An existing business has an established name and established customers. • • • Self-employment exists in an independent business. • • • Starting a franchise can be faster than starting an independent, but purchasing an existing business bypasses the startup phase, which means you make money beginning the day you buy the established company. • • • An existing, profitable company has a proven formula for success. • • • An independent business has a perpetual life, unlike a franchise with a life set by the term of the franchise agreement. “Owning” a franchise is more like renting the business for the term of the franchise agreement. • • A non-franchise business has benefits that are not available to franchisees: When you purchase an existing company, you don’t add to the field of competitors, and you have total independence to operate the business any way you want and then sell it when you want on your own terms. The bottom line is: You make your company successful or a failure, even with a top-rated franchise providing excellent support to franchisees.
Want a boss? Buy a franchise. Go to the library. Read trade journals for any industry in which franchising is prevalent. You’ll discover that some franchisable concepts breed more franchises. They compete with one another and everyone else in their niche. Their marketplace becomes saturated with competitors, so few make good money and some close down. Franchise owners who survive are stuck with a “job” they can’t quit, and a “business” they can’t sell. Don’t expect to buy an existing franchise with the hope of getting around the problems of starting one. If it’s a winner, it’s offered to existing franchisees or it becomes a company store. Don’t be naive. Make inquiries.
Don’t make this dangerous mistake with franchises. Don’t naively assume that it’s wise to buy a franchise from a franchisor that passes your evaluation with flying colors. • After a franchisor proves its capabilities, investigate the industry in which your business will operate, as if you were starting an independent business or buying an existing one. • • Remember: Unless you buy an existing franchise location, you’re starting a business; you’re adding to the competition and the market share (pie slices) become smaller for most if not all the competitors!
Look for competition posed by franchises. Avoid industries that are saturated with competing franchise systems.
from University of Pennsylvania in Portland, OR, USA
Ultimately, we pursued and closed on the deal because everything other than the franchise element matched or exceeded our search criteria. The franchisor has been good to work with and available as a consultant, while largely staying hands off. I speak with my contact monthly and if we are generating marketing content we pass it by the franchise brand leader who checks it for compliance with the brand guidelines (no different than I've experienced in any other company). We also maintain our chart of accounts in a way that meets the franchisor's template so that the P&L info we share up to the HQ is useful for creating a comparable dataset across all franchisees. Beyond that we run the business without constraints, including setting prices, choosing suppliers, HR decisions, everything.
The positive factor that I did not account for in evaluating the opportunity was the built-in peer group with other franchisees of the same brand and of other home services brands owned by the franchisor. I've traveled to shops across the country and developed a network of other owners with whom I regularly meet for best practice sharing and strategic ideation. And I get great benchmarking data fed back from the franchisor who aggregates all of the shop information and splits it into relevant segments.
The reason this franchise acquisition is working for us is that the prior owner already put in the hard work establishing a large business (at least in the plumbing world) and forming a team. The size of the company is sufficient that what the owner/President role requires is a match for what I bring from other business leadership experiences. If this was a start-up territory within the franchise network my odds of success would have been low. I'm skeptical that, despite their best efforts, the people at my franchisor's office could have turned me into the front-line leader of a brand new plumbing shop.