Starting a business is hard, so unsurprisingly, most people look for ways to reduce their risk. One of the most common strategies is to buy into a franchise instead of starting a business from scratch. While launching with a proven business model, marketing materials, and support infrastructure may seem like a no brainer, there are actually a lot of flaws to the franchise model.
I say this as someone who understands the franchise world quite well because I am the CEO of a national franchise company. I deal with this model every single day, overseeing both the business itself and the franchisees who have bought into our franchise system.
While there are a lot of benefits that come with a franchise, there are also numerous flaws, so it’s important to understand exactly what you’re getting into.
Let’s start with the first, and I believe, the most important factor, which is whether you should even start a business in the first place. One of the flaws I often see in the franchise world is that the brokers will do everything in their power to convince everyone that they can and should start a business. Nothing could be further from the truth.
A lot of very smart, hardworking people simply are not cut out to run a business. It requires a broad range of skills that not everyone has, typically demands far more work than most 9-5 jobs, and creates a level of stress that first-time entrepreneurs usually aren’t prepared for. The truth is that while your typical job is usually pretty straightforward and consistent, entrepreneurship is anything but that, and in the beginning, you’re doing everything on your own. It’s a pretty unforgiving environment.
Unfortunately, most brokers will ignore these details and try to sell a franchise to anyone able and willing to pay the franchise fee.
I saw this first hand early in my own company’s founding before I came on board. The previous CEO was working with a few franchise brokers to bring in new franchisees, and unfortunately, those brokers were too aggressive in their prospecting. As a result, we brought in a number of new franchisees who were extremely capable, but frankly, not built for entrepreneurship. The brokers had convinced these highly paid executives that running a business would be just like clocking into their Fortune 500 jobs, with clearly defined hours and responsibilities, and that they could just show up and be the boss without having to do much real work.
That is never going to be the case.
Even with a franchise, you’ll face most of the same challenges that any other entrepreneur would, so if that’s not an environment you’re comfortable in on a daily basis, entrepreneurship—even under a franchise model, simply isn’t for you.
Another factor is marketing. In a typical business, you have free reign to market your company however you see fit, subject only to the effectiveness of your campaigns, but in a franchise business, you’re locked into the marketing created and approved by the franchisor. Each franchise company treats this a little bit differently. Some are shockingly strict, while others set far looser guidelines, but all will exert some degree of control over your marketing efforts.
If you’re creative and like to do things your own way, you’ll likely bristle under this kind of control, especially when you feel like it may be limiting your potential. It’s important to remember that the marketing a franchisor develops for its franchisees is carefully planned and tested to ensure franchisees will be as successful as possible, but despite that, if you aren’t willing to stick to the system, a franchise business isn’t right for you.
And the third factor is the term of the franchise agreement. When you join a franchise model, you’ll typically be required to personally sign a 30-year commitment to a minimum amount of royalties due to the franchisor every month. These royalties are based on the amount of revenue that your business generates, and are used by the franchisor to maintain and improve the systems and infrastructure they provide to their franchisees. As your revenue increases, so will the amount due each month. This makes perfect sense because as you generate more revenue, you will also use more of the franchisor’s resources and infrastructure. But it’s important to remember that there will always be a minimum royalty due each month whether you succeed or not.
While I believe the franchise model is incredibly powerful for the right people, a 30-year commitment is a big one that can have lasting financial impact if things go badly. That’s why it’s so important to know exactly what you’re getting into.
Ultimately, starting a business is one of the toughest things you can do, and there’s no right or wrong path—only a path that works best for you based on your personality, risk tolerance, and capabilities. So get out there and start a business if you believe that’s your passion, but make sure you understand the advantages and disadvantages of your options.
That’s how you create the greatest chances for success.
