By the time he was in his mid-50s, Ray was a mediocre, unhappy, traveling milkshake mixer salesman.
And then it happened.
The fateful day that changed everything. His life. Your life. And mine.
On that day, Ray called upon a new client – a restaurant in Southern California. It was there that Ray discovered a radical new way of running the business. So amazed was he, so enamored, that Ray committed himself 100 percent to working with and for the brothers who owned the place. Before long, they gave in to Ray’s enthusiasm and cajoling and hired him.
Within 10 years, Ray Kroc’s vision for what the McDonald brothers had created begat a behemoth, and he had invented the system of franchising along the way. New franchisees were taught the McDonald’s way, allowed to use its name, brand, recipes, and systems, and (for a fee of course) were able to open their own McDonald’s.
So yes, franchising is a remarkable way to join something bigger than oneself, but it doesn’t come without risks. Indeed, there are both pros and cons to buying a franchise.
Maybe the best part of buying a franchise is that you are buying into a proven system. Here is how it works: Somewhere, some business owners created a successful business they thought could be duplicated, systematized and taught. The owners reduced their success to a step-by-step plan, and that plan – the system – as well as their business model and brand and “secret sauce” is sold to would-be entrepreneurs.
That is the essence of a franchise.
The idea is that if the franchisees do what the owners did, they will get the results that the owners got. A good franchise then is a systematic way of doing business whereby you agree to do things the franchisor’s way and are being allowed to use their business name, logo, system, and so on.
So, the first benefit of franchising is that you theoretically reduce your risk of failing as you are buying a proven business success system.
The second good thing about buying a franchise is that you should get plenty of help. Ray Kroc put it best: As a franchisee, you might be in business for yourself, but you are not in business by yourself. Whereas when you start a business from scratch you are on your own, when you start a franchise, the franchisor and other franchisees are there to help you succeed.
The franchisor in particular will offer expertise in a wide variety of areas: marketing, accounting, finances, labor, etc. A good franchise system therefore should train you to be a successful businessperson.
The last benefit of franchising is that you will get assistance with your advertising and marketing, and with the bigger franchise systems, you will get the benefit of their national advertising campaign.
While the benefits of buying a franchise are significant, the downsides must be considered too.
The first is that it can be expensive to buy a franchise. When you are buying a franchise, you are buying the franchisor’s name, logo, goodwill, expertise, system and training. That can be worth a lot, especially for a well-known franchise. This is not to say that all franchises are expensive, there are many that are quite reasonable, but just know that if you want to buy a name-brand franchise, you will pay for that right.
How much? Here are a few examples:
- Want to buy a Taco Bell? Startup costs, including construction expenses, range between $1.2 million and $2.6 million for a new restaurant, according to the company's franchisee disclosure document. The franchise fee alone (the fee for buying in), is $45,000.
- Conversely, a small home-based franchise system might have a $2,500 franchise fee and total costs of $10,000.
The second issue is that you will have less independence as a franchisee than you would as a regular entrepreneur. The system is the system, and you will agree in your franchise contract to run your business according to the system. Because the franchisor trusts you with its brand and goodwill, you will need to do things their way.
The final downside, and this is important, is that in relation to your franchisor, you will be in a position of relative weakness. The franchise contract, for example, is drafted by the franchisor’s attorney to favor them. The franchisor will know more about the business than you, and likely will be better financed than you.
Not insignificant, any of this.
The important thing to understand in this regard is that not all franchisors are created equal; some are great to work with while you should run in the other direction from others. How do you know the difference?
- Speak with other franchisees to learn of their experience
- Use Google
- Research potential lawsuits that the franchisor has been involved in
All in all, if you do your homework and find a good franchisor to team-up with this, you should find that franchising can be a really great way to get started in business.
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business Success.© Steven D. Strauss.
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