Watch Out For These 5 Traps When Joining A Franchise
Buying a franchise is the most effective way to start small business, especially for those who do not have prior business experience. The benefits of franchise such as brand recognition, operational support and marketing make it easier for the first-time business buyers to realize their dream of owning a business.
Not all franchises are created equal, however. While many franchises do provide above mentioned benefits, you may also run into few whose primary goal is to make money for themselves, many times at the expense of franchisees. You have to be careful about the type of franchise you choose.
When looking at the issues that franchisees are likely to come across a few themes emerge. You have to pay attention to these issues before you send the check of initial fees, which run into tens of thousands of dollars. Listed below are the 5 common traps you need to watch out for.
# 1. Too many units
Most franchises require their franchisees to pay royalty bases on gross sales. They can maximize their royalty by opening as many units as possible to reach broad customer base. However, when this is taken to the extreme and many units are opened in close proximity the franchisees will suffer as a result of sales cannibalization from nearby units. Many Subway franchisees have been complaining about this recently.
# 2. Discounting
The Great Recession of the last few years has increased the amount of promotions and discounts announced by well-known franchises. Their goal is to keep sales from declining when customers are cutting back on their spending. Of course, the franchisees will see their profit decline as a result. Again, the franchise will continue to make money in royalty at the expense of franchisee profits.
# 3. High commissary cost
Most franchises require you to purchase some or all of the ingredients from their commissary. Their primary explanation is that it ensures quality and consistency. The franchisees can also benefit from the economy of scale especially for large franchises like Subway and McDonald’s. However, in some cases, franchises take advantage of their power by charging a lot more than the market price. This is especially true for smaller franchises. You should do your homework to compare quality and price of the products you are required to purchase from commissary versus in the market.
# 4. No product refresh
Some franchises get initial success by coming up with an interesting product idea. Once they become successful in luring franchisees they stop developing new products and just try living off of their one-hit wonder. The problem is the world doesn’t sit still. There will be other competitors working on their next big hit. In addition, the customers will also become tired of the same old concept and move on. As a result, the sales will decline. The franchisees are at the mercy of the franchise and cannot do much. They end up paying the ultimate price in terms of shutdown.
# 5. Access to management
I have seen this problem with many smaller franchises. One of the benefits of franchise versus independent business is to learn from their experience and get help when you need it. If you do not have easy access to management and their experts you are not receiving that benefit. It also helps to have regular reports that show the performance of all units and the franchise is performing in the market, but not all franchises publish this.
While the franchise route provides a great avenue for new entrepreneurs to realize their dream of owning business you have to be careful about the franchise you select. By looking out for these traps you can avoid being stuck and losing your hard earned money.
What other traps have you seen in the franchise business?
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