Purchasing a franchise can be one of the best paths to owning a business -- but don’t get lazy. Entering into a franchise agreement does not mean you are purchasing the yellow brick road to profitability. Being a part of a franchise also does not alleviate you from your duties as an entrepreneur. After all, a franchise is still a business, and all businesses require work to be successful.
Some people think that going the franchise route will make their job easy. I mean, the franchise does everything for you, right? Wrong! There are many mistaken beliefs people have when considering being a franchisee. Here are three of the biggest franchise misconceptions I have run across in my career.
1. No need for additional marketing and advertising
One of the benefits of being a franchisee is the advertising. Most established franchises do advertising campaigns to help attract customers to your business. All you do is pay your royalties each month, and a percentage of those -- as spelled out in your franchise agreement -- go to running print, television and radio ads.
While this seems like a great benefit to you, it actually does more for the franchise branding than it does for you as a franchisee. You will likely have no say in any of the advertising campaigns. This means that anything you are doing on the local level will not be highlighted -- unless you put forth your own advertising campaign.
You also need to take into consideration local targeting such as social-media marketing and website marketing. The franchisor likely has its own website, but what about you? Their Facebook page is going to be full of information about the company but have little (if anything) about your store.
When considering a franchise, always budget for additional advertising and marketing outside of what is listed in the franchise agreement. This is extremely important when you are in an area saturated with the same franchise, as you want to make your location the one people want to visit.
Related: Is Franchising a Fit for You?
2. Success is guaranteed.
A franchise is an established brand, and as such, people think they will be automatically be successful as a franchisee. If you see all the franchises in your community doing well (e.g., Jimmy John’s, Supercuts, Anytime Fitness) you may naturally think this is the case. This is a huge misconception and can cause you to have unrealistic expectations.
Franchise locations close all the time, the majority of which do so because of non-profitability. Just ask Jimmy John’s, the nation’s number-one franchise in 2016, which recently closed up shop on Staten Island. Profitability can be based on many factors including location (the likelihood of the Staten Island closing), management and legal issues associated with the franchisor.
A franchise may also not be as established as you think. If that is the case, your expectations (and what is stated in the franchise agreement) will not be met. This is why it is important to research a franchise thoroughly before entering into an agreement. The worst place to do your research is on the company’s own website. The best place to look is with current and previous owners of the same franchise.
Just because you buy an established brand does not mean you are buying its profitability. It takes hard work on the part of the franchisee as well as the franchisor living up to their end of the agreement in order to make it successful.
Ultimately, success lies with the franchisee.
3. Leaving a franchise is easy.
Closing up a business is more difficult than you think. There are many concerns (e.g., legal and financial) that you must consider and are only the tip of the iceberg compared to closing the doors and moving your entire inventory.
When it comes to franchising, there is a little bit extra that you need to consider. If you do decide to close up shop, simply walking away is not an option. Under most franchise agreements, you are still liable to pay royalties to the franchisor.
Don’t think because you aren’t making money that you won’t have to pay your percentage of revenue. Most, if not all, franchise agreements require a minimum royalty payment regardless of revenue. So even if you close up shop, you are still obligated to pay the franchisor for the length of the agreement.
On the flip side, it is possible that you involuntarily leave the franchise. Do not get too comfortable and expect the franchisor to renew your agreement. A great example is from 2011, when McDonald’s notified one of its franchisees in Daly City, Calif., that it did not plan on renewing the franchise agreement. After an exhausted legal battle, the franchisee lost.
While going the franchise route may seem like a good route, you must consider that it is still a business. There are benefits and drawbacks to owning a franchise just like there are with starting your own business from scratch. You know the saying -- if it were so easy, everyone would do it, and obviously not everyone is doing it.
Have you been a franchisee? Would you agree with these misconceptions and maybe you have more to add? Let me us know on Twitter using hashtag #FranchiseMyths.
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May 24, 2016 at 12:32AM