It can be. Price Waterhouse Coopers in a recently completed study sponsored by the International Franchise Association estimates that about 1 in 12 retail establishments in the US are franchises and $1.15 trillion in sales (about 40 percent of all retail sales) were made through franchised establishments in 2001. While not every franchise or every franchise owner is successful, franchising has the potential to reduce some of the risk of launching a new business by letting you copy a business concept someone else has already made successful.
What specific benefits does a franchise offer?
Depending on the franchise, among the benefits you might gain are:
a business concept with a track record for success
name recognition for the business
access to proprietary methods and/or processes used in the business
a ready-made business or marketing plan to follow
ready-made ads, brochures, and other sales and marketing aids
What are the disadvantages?
The security you acquire by franchising business methods and practices has its price.
Among the drawbacks of being a franchise are:
Your start-up costs can be high.
You will have to follow the franchisor’s rules. That means you might have limitations placed on everything from what products and services you sell to what goes into ads, where you are allowed to sell, and even how your business is furnished.
You pay a percentage of your sales and/or a flat fee to the franchisor (company from which you purchase the franchise) each year.
Your success is dependent in many respects on the brand, talents, foresight, and stability of the franchisor.
You will be locked into the terms of the contract with the franchisor whether your operation is successful or not.
Unfortunately, not all franchise opportunities are legitimate. Con artists seeking to capitalize on the franchise boom create their own “investment” opportunities, which they promote to inexperienced investors. To induce the unwary to invest, these con artists promise the world, but deliver little to nothing. Be cautious if you are given following typical come-ons:
Promises of unrealistic profits. Use your common sense when evaluating such claims. Will it really be as easy as it is claimed to make the substantial profits promised?
Promises of guaranteed earnings in a “protected market area.” A bona fide business opportunity will usually not make such a sweeping guarantee. An investor in a fraudulent promotion often finds that there are other unwary investors operating in the same “protected market area.”
Guaranteed money-back refund if not completely satisfied, as long as the investor “operates according to instructions.” Such guarantees are usually worthless. The promoter determines what “operating according to instructions” means, and the investor is often judged not to have met the criteria — hence, no refund.
Be wary if the promoter is more interested in selling the distributorship or franchise than in marketing a product or service. Also, if you are not encouraged or allowed to contact other investors to ask about their experience and results with the promotion, think twice about investing.
Matthew Anderson is the founder of The Franchise Shop website which specialises in top franchises uk