Purchasing a Franchise Business: Advantages and Disadvantages

Franchising is a popular way to start a new business. In a franchise arrangement, the provider, or franchisor, contracts with you, the franchisee, to give you the right to sell or distribute a service or product in a particular area.  A franchise offers advantages and has disadvantages.

Advantages of a Franchise

• Some require relatively small capital investment with franchise financing

• Initial corporate support for start-up

• Continuous management training and counseling

• Existing goodwill and brand name appeal (sometimes)

• Standardized quality of goods/services

• Proven products and business format

• Group purchasing power

• Some opportunities require no prior experience in that business field

• Buying power and programs

• Development of advertising and promotions programs (both local and national)

• Site analysis—help in deciding on a site based on past experience

  Disadvantages of a Franchise

• Complicated legal negotiations

• Restrictions on purchasing

• Franchising fees

• Required to share portions of business profits with corporation (sales/royalties)

• Loss of control over some aspects of operation (e.g., use of name/logo for advertising, territory,uniforms, product purchasing requirements)

• Less freedom

• Potential problems if owner wants franchisor to buy franchise back

• Limited control over pricing, product lines, and suppliers

• Human resources policies may be instituted by corporation (potentially unsatisfactory training programs)

• Actions by the corporation may affect business of franchisee (especially new store locations close to yours)

Locate a list of lawyers specializing in franchise negotiations while in the research stage. Once a franchise opportunity has been selected, retain a lawyer for every step of the negotiations. The negotiations serve as the foundation of the franchise.

Working with the lawyer, set policies and agreements that will enable the franchise to thrive now and in the future. All obligations, rights, privileges, risks, opportunities, assets, and liabilities must be detailed and agreed upon by all parties before the contract is signed.

The US Department of Commerce offers a publication, Franchise Opportunity Handbook, which is up-dated every two years. For a low cost it can be ordered from Superintendent of Documents, US Government Printing Office, North Capitol and H Streets NW, Washington, DC 20402. There are also a number of books on franchising available at public libraries and bookstores.

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