I’ve had a few people tell me that they would like to open a franchise of some well-known business in their area. In fact, people have even recommended I open a franchise instead of running my own business. I never want to go into a big rant, but I think many people are misinformed about how opening a franchise really works.
In general, the idea is simple. You get to use the brand, business model, and corporate connections to build what seems like an instant business. To most people, it sounds like the corporation is backing you up; that this is a sure-fire way to make money. The problem is that’s not usually how things pan out. Just look around your neighborhood and see if you can find a renovated pizza hut or KFC building. Franchises fail and it’s not the corporations that take the hit.
Most people who open franchises have never run a business or had formal training in business. It’s why they are drawn to the idea of having “someone else” take care of anything that isn’t day-to-day operations. This inexperience means they may neglect to do a market analysis for the location and brand. They may find themselves unequipped to handle hiring good candidates. The list of things that could be overlooked is nearly endless.
Once you have the business up and running the trouble isn’t over. Since you don’t technically own your business, you have to deal with a few more financial burdens. The first and most obvious is that you have to pay a monthly fee to maintain your franchise license. This is in addition to the up-front fee you pay just to open your doors. Another financial burden that makes running your business difficult is that you don’t get to set the prices. You may have a slight say in what is stocked or served, but pricing has to be standardized across locations in most franchises. That’s not always a huge deal though, right? After all, the market would dictate pricing if the corporate headquarters didn’t. However, the corporate headquarters also dictates your cost of goods. If you follow, the corporation controls your profit margin. That makes it exceedingly difficult to turn a failing situation around. Of course that’s not all though. The corporate headquarters also get’s to decide if you are running a promotion, though they might not communicate it to you. This happened a few years back with KFC and their free chicken promotion.
It’s obviously a struggle to run a franchise, but then, there is one last factor that tends to ensure failure for franchise owners. The corporate headquarters has the ability to close your location at any time without reason. They insist that they need this control to maintain brand standards.
After the dream of running a franchise turns into a nightmare, most franchise owners hope to sell their franchise license, maybe even for a profit. However financial failure or having your license revoked is more common than a franchise owner selling their license.
So if you’ve been thinking about opening a franchise, you might want to reconsider. If you have never had an interest in owning a franchise, then take this information out into the world. And, you might want to consider supporting local businesses instead of the cruel franchise model next time you go out shopping.