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10 Reasons Not to Buy a Franchise (If You are Not Ready for Franchising)

Success in franchising

Success in franchising

There are always pros and cons in franchising. The pros always believe that strong brand name and proven systems are the main benefits of franchising. The cons always believe that franchising is expensive and unfair (benefit franchisors more than their franchisees.)

I am always pro-franchising. However, I can not deny that there are some legitimate reasons why you should not buy a franchise, if you do not have the proper mindset and knowledge for franchising.

10 reasons not to buy a franchise

According to Nolo.com, there are 10 good reasons not to buy a franchise:

  1. Questionable profitability
    Most franchise owners don’t show potential franchisee the whole picture – They use “tricky” but legitimate financial numbers (e.g. average sales figures and profits before expenses are deducted) that are useless in giving you idea your likelihood to succeed.
  2. High start-up costs
    Franchise fees are expensive. Inventory, equipments, furnishing and fixtures are expensive.
  3. Encroachment
    If the area your franchise unit serving in is proven to be lucrative, nearly all franchisors reserve the right to establish franchise units there.
  4. Lack of legal recourse
    Franchisees have little legal recourse in disputes against the franchisors. Moreover, in the US, the Federal Trade Commission (FTC) doesn’t seem to prioritise franchise-related complaints it receives.
  5. Limited independence
    You must follow a set of rules, including your franchise units’ design and operating standards.
  6. Royalties payment
    Franchisors take a certain percentage of your franchise units’ sales (or profit – depending on which franchises you invest in) that could considerably affect your profitability.
  7. Inflated pricing on supplies
    Franchises partner with suppliers they recommend, and most require you to shop with their suppliers, that often offer products at higher price tag (and yes, franchisors do profit from every step of this supply chain.)
  8. Restrictions on post-term competition
    Most, if not all, franchisors require you to sign non-competition agreement that could last for years, even after you not a franchisee anymore. So, yes, you are not allowed to open a similar business on your own for a certain number of years.
  9. Advertising Fees
    Franchisees are often required to regularly contribute to franchisors’ advertising fund. Will they fully report how they use the fund? No, and they are not obliged to.
  10. Unfair termination
    Many franchisors “punish” franchisee with an agreement termination over a mere case of late royalty payments or violating the franchisors’ standard operating procedures (SOPs.)

I am interested in franchising. What can I do about all those drawbacks?

Franchising is a very good business concept for the right people – Think about it: You have the transferred benefit of influential brand name and proven business system – Two of the most important factors in building a successful business.

Those 10 reasons not to buy a franchise are meant to heed and warn you not to invest in any franchises blindly.

Here are two suggestions I have for you:

  1. Read and understand the offered Uniform Franchise Offering Circular (UFOC) and franchise agreement
    UFOC, a legal document containing franchisors’ information that give potential franchisees enough information to make informed decision on their investments, is given at least 10 business days before franchise agreement is signed. If you are not sure about the details covered, ask your lawyer to help you out reviewing the UFOC and the franchise agreement – It’s better being ultra-careful before everything is signed.
  2. You are obliged to learn everything you can about franchising
    It is not wise to invest in something that you don’t know. Learn as much as you can, and know the pros and cons of franchising, even before you shop around for franchise to invest in.

Ivan Widjaya
Educate yourself about franchising
Image by cobrasoft.

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