How to Understand the Disadvantages of Franchising

Controls inherent to a franchise may turn off some would-be entrepreneurs. However, there are a number of reasons to consider this business option despite the obvious disadvantages. Sometimes giving control to a more experienced party can actually be advantageous to the new business owner or first-time investor. Federal regulations and ease of finance attract many who would be otherwise put off by the strict controls of implied by a franchise arrangement.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Computer with Internet access

1. Be aware of the territorial regulations, employee and organizational requirements and royalties payment obligations embedded in any Franchise Agreement before signing. These dense documents contain a number of stringent guidelines franchisees are obliged to uphold or risk loss of invested monies and time.

2. Forgo control of your business model in order to take advantage of a franchise's easy-to-access model for business success. If you do not enjoy working within carefully defined parameters, a franchise is probably not for you!

3. Face the consequences if you don't comply with stipulations listed in the Franchise Agreement. You may have to invest a great deal of money and time in the event that the franchisor takes legal action to terminate the agreement on the grounds of your defiance.

4. Franchise your own business only if you are comfortable being legally and federally obligated to all franchisees on the basis of strict guidelines imposed by the Federal Trade Commission.

5. Lose your autonomy to the franchiser as a franchisee when you subscribe to their business model. If your views ever clash with those of the organizational leaders, you will probably be unable to adjust your business practices according to your own wishes.

6. Don't expect to exercise a great deal of personal innovation when you sign on to an established franchise. While you get to take advantage of a fully tested business model with a pre-existing customer base, that security does come at the price of flexibility.

7. Anticipate fees. In exchange for the right to use the franchisor's name and sell its products, you will likely have to pay royalty fees and advertising fees among other expenses.

8. Read the FTC's Consumer Franchising Guide, which aims to help people understand the pros and cons of franchising (see Resources below).

Tips & Warnings

• Talk to other franchise owners within the industry you are considering. Find out their experience, profitability and biggest complaints. Ask for advice in terms of negotiating favorable terms and navigating the early days of business ownership. First-hand knowledge is often the most valuable.
• Spend a few hours reading up on the disadvantages (and advantages) of franchising on helpful sites like FranInfo.com and the Franchise Forum (see Resources below).
• Never enter a franchising contract without first carefully examining all disclosure documents from the franchisor (with the help of a franchise law attorney, if possible). Risk being duped for your funds or worse without conducting due diligence in advance!
• Don't jump into a franchise opportunity without doing your research. Take a few weeks, at the very least, to weigh all of the advantages and disadvantages carefully.
• Understand that some Franchise Agreements do not allow the franchisee to terminate the contract early. Try to make sure your contract gives you an “out” in case the business is not profitable. Otherwise, you risk breaching the contract and being liable for early termination fees and/or costs incurred by the franchisor as a result of your abandoning the franchise.

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