Should you Buy a Franchise Business?

Hey. Hey. Welcome back to my channel. Today we're going to dive into the franchise business model in greater length and talk about the pros and also the cons of going the franchise business route. So let's dive right in and talk about the franchise business model in terms of the pros or advantages. Number one, you're going to get instant brand recognition. You're not going to have to spend years or hundreds of thousands of dollars building a marketing presence for your consumers or customers. That's already going to be done for you in a proven business model through the franchise. A lot of times they are going to centralize their marketing efforts. So even the continuous branding and outreach is going to be done for you. You're not going to have to worry about crafting that story to tell to your customers because chances are they already have a well recognized brand that already resonates with them and it's just about, you know, continuously getting out in front of them to help drive more business towards you. Second, advantage is a proven business model going the franchise route. There's probably been hundreds of people, if not thousands, that have followed your footsteps and have been very successful at it. And that has given the franchise the opportunity to create a playbook step by step of everything you need to do within your organization to be successful. And, and that's really going to set you up for success for the long term versus an independent business route where you're on your own, you know, you're carving your own path. You don't have a playbook of step by step of exactly what to do to be successful. You have to create that yourself, which can be very difficult. Advantage number three is training and support. You're going to have access to resources that you wouldn't otherwise have access to if you were starting from scratch and building your own business. Things such as, you know what I already mentioned marketing support. That's already going to be done for you. You're probably going to have access to the legal team. Anytime you have any legal issues that come up, you're going to have the right resources to step in and help you out. You're probably going to have back office support, they're going to help you, they're going to give you vigorous training. I know a lot of franchise models have, you know, two, four week trainings where you go to corporate and they give you step by step everything you need to know to run your business and be successful at it. The next advantage that I see in the franchise model is purchasing power. A lot of times the Franchise is going to have direct suppliers that they work with and their purchasing power is going to be a lot better than what you can do with on your own. And what I mean by that is when a franchise is spending millions of dollars with a certain supplier, that supplier is incentivized to one, keep you happy or keep the franchise happy. And two, they're willing to give them deeper discounts because of all the continued business that they're receiving versus you as an owner operator, maybe let's say you're spending $1,000 with them. They're not really incentivized to give you a deep discount because, you know, if you do the math, millions of dollars versus $1,000, that's not a huge amount. So you're going to get better discounts and better pricing. Next advantage is a structured growth plan. Whether you want to be a one store operator or one location operator, or if you want to scale up to hundreds, if not thousands, that it's very likely that there's already been people that have done this before in that franchise model and they can show you exactly how you can scale into that and roll up into multiple locations. And again, you're going to have access to the resources and the knowledge to help you get that done if that's the path that you want to go down. The last advantage we're going to talk about with the franchise model is financing. A lot of times financing can be easier in the franchise model for one or two ways. One of them being when I talked about the purchasing power where the franchise can step in, they can do the same on the financing, right? If you're trying to get a bank loan, the franchise can step in and essentially provide their stamp of approval, which holds a lot of credibility, as after they've already done their due diligence on you and qualified you as a buyer, they can help step in and qualify you for financing. Same as well. As opposed to doing it on your own, you're gonna have a lot more challenges because the bank or the lender, they're gonna know that you're doing this on your own and they're gonna solely look at your resources, right? As opposed to the franchise. They know that you're gonna have access to all these resources and, and you're going to be set up for success. Some franchises also offer in house financing, which is even better because after they've qualified you, they're already comfortable with you as a potential buyer. So they may just offer in house financing and let you finance the whole thing directly with Them, which is amazing. If you've never tried to get financing before on purchasing a business, you're going to learn real quick that it is very, very difficult. All right, so we've talked about the pros of going with the franchise business model. Let's talk about the cons, because there's definitely some cons. The most obvious one is going to be less autonomy. You are not going to be free to make all the decisions you think you're going to be free to make. And what I mean by that is, you know, it's kind of a double edged sword. When we talked about the pros. Well, that can also be a con to, to where, you know, you have to follow a very structured plan and that's put in place for you to succeed. On the other side, you're going to be really restricted in terms of what you can and can't do. So that's a big, that can be a big deal to entrepreneurs in terms of how comfortable are you in relinquishing some of that control in decision making for the purpose of following that structured, well laid out plan for you to succeed. Another big con is royalty payments. We talked about the benefit of receiving all of these resources and back office and marketing and all that support that doesn't come free, right. There's going to be a cost to that and usually it is a royalty payment. And that's typically in perpetuity, meaning that's going to be forever. It could be something like 5% of revenue. So every dollar you earn, 5% of that is going to be coming back to the franchise. Depending on what your profit margins are, that can be a pretty sizable amount of money that otherwise you would have been keeping. But on the other side, you know, if you're doing it on your own, yeah, you get to keep all the profit, but you're not going to have access to all these resources. Another significant cost can be the initial franchise fee. That can be, you know, depending on the franchise, it could be $5,000, $10,000, it could be 50, it could even be a hundred thousand dollars. You know, some of them get pretty steep and those are, those are like pretty significant startup costs that you otherwise wouldn't have. You know, really, that is just purely going to, hey, you know, I'm signing up, I'm getting access to the infrastructure. You're not really getting a hard tangible asset as opposed to starting up on your own. If you had $100,000 of startup cost, likely you're spending it on equipment or other things that you can add to your balance sheet that are creating value for your company versus the franchise model. It's argumentative, you know, towards what value that's, that's, that's giving you, it's really just giving you access. Another con to going with the franchise route is going to be contractual obligations and vendor dependency or relationship dependency, briefly mentioned that before. So you may be forced to use certain vendors, you may be forced into certain contracts. And again, if you look at it from the franchise side, it's to protect you overall, it's to your benefit. But at the same time, as an operator in a franchise model, you're not going to be able to build key relationships that you want to build build. You're going to be restricted to using certain relationships. So you have to make that determination if that's something that you're willing to do or not. Depending on what industry you're in. Some industries may be more relationship heavy than others. If you're in a extremely heavy relationship business, that may be a deal breaker for you. You may want to have direct relationships with everyone in your local community. And that's probably not going to be a choice that you're going to have in the franchise model. You may be forced to use a supplier that's in a whole different other state. And there's not going to be really any relationship because the person that really owns that relationship is someone within the franchise. At the corporate level, the last thing we want to talk about is exiting. So you may have challenges selling your business as a franchise because there's other entrepreneurs that like franchise models, right, because of the restrictive controls and that may affect the value. If you think about people purchasing businesses, they're looking to acquire something that they don't currently have today. And they are looking at competitive advantages and they are asking themselves, does this business have a competitive advantage and does it have things, resources that I don't have today? And those are really the main questions that they're trying to solve when looking at a business to purchase. If you don't have competitive advantage over other businesses similar to you. And if you really think about it, you really don't because you and the other thousand franchise operators are all operating from the same playbook. So your competitive advantage is pretty limited because you're all doing the same exact thing and following the same process. Now, some franchise operators are obviously better than others and there's some intangibles that go with that in terms of what make one operator better than another operator. But in general, there's a lot of people that don't like that. Also, entrepreneurs tend to go against the grain and they maybe want to make all the decisions themselves, right? They want to be in control of their success or failure. And that's not going to be something that you're going to have complete control of under the franchise model. So that may affect your valuation and you may end up having to sell for less money than you think your business is worth. And the franchise itself may have restrictive controls on how you can go about selling your business if you want to exit. So I hope this video is helpful to you. We covered the pros and also the cons of going the franchise business model route. At the end of the day, you have to figure that out for yourself, right? It comes down to your personality and also your desires of what you're looking for. You, me personally, I like going the independent business operator route, but again, that's a personal decision and that's not completely eliminating the franchise model for me. I would definitely look at doing the franchise model in certain businesses and it really just depends on a case by case scenario. So hope you like the content. See you next time.