THE FRANCHISEE'S PERSPECTIVE - COSTS

It is important to consider the benefits and costs from the franchisee's perspective before deciding to buy a franchise.

Costs

The benefits to purchasing a franchise explain why more than 500,000 franchise opportunities exist in the United States. However, this compares to almost 14 million independent businesses. There are obviously reasons why not everyone chooses the franchise option.

Payment of franchise fee. A major drawback to starting a franchise is the initial franchise fee. This can range from a few thousand to several hundred thousand dollars. There are two critical matters that affect your decision about buying a franchise. These are whether you can afford the franchise fee and if you can expect a reasonable return on investment.

On-going royalty fees. Franchisors also will typically require a franchise to pay continuous royalty fees. The fees are a percentage of the gross income form the business. Usually the royalty fee is less than ten percent. Some franchisees begin to resent the royalty fees after several years because they have developed experience and built a strong customer base. This success often results in a feeling that the business could continue without the assistance of the franchisor. Besides the royalty fee, franchisors often require a cooperative marketing payment that amounts to a small percentage of gross income.

Conformity to standard operating procedures. It is important to understand that for most franchisors, there is just one way to do things, and that is their way. Success results from proven methods of operation, so the franchisor does not want any variations. A franchisee can become frustrated when he or she believes that there is a better way to do things.

Inability to make changes readily. A franchisor may prohibit you from selling products or services other than those approved by the franchisor. These restrictions are difficult to follow when you believe that there is strong customer demand for a new or different product. There is often a method for making suggestions, but this can be cumbersome and time-consuming. The franchisee is subject to decisions made in the central office of the franchisor. As a franchisee, you must be willing to limit your independence as an entrepreneur.

Underfinanced, inexperienced, weak franchisor. It is important to realize that all franchisors are not equal. You may have more to offer the franchisor than the franchisor has to offer you. It is critical that you carefully check the credentials of the franchisor's management team and board of directors. However, do not ignore a franchisor just because the franchisor is new. Doing this may result in the loss of a great bargain. How many people wish they could have bought a McDonald's franchise when Ray Kroc first began selling them?

Duration of relationship. There is typically no way to extricate yourself from a relationship with a franchisor other than to sell the business. Find out what restrictions exist on selling the franchise to another person. Also, determine what conditions must exist to force the franchisor to buy back the operation. Given the permanency of most franchise relationships, you need to ask yourself whether you want to be involved with the franchisor for the rest of your business career.

Dependent on franchisor's success. The success of a franchise is usually dependent on the franchisor's success. Some well-known franchisors have failed such as Lums and Arthur Treacher's Fish & Chips. When this occurs, the franchisee usually fails. Carefully examine a franchisor's business plans and financial reports. This will help identify potential weaknesses. However, many problems occur when a franchisor is purchased by a larger corporation or when a new management team is brought in to run the business. When this occurs, the franchisees are unable to control the situation.

People who decide to purchase a franchise are typically happy with their decision. According to a 1992 Gallup poll, 73 percent of franchisees met or exceeded their expectations. The growth rate for franchise operations often outpaces the economy. Thus, franchising can be an excellent choice. But is it the right choice for you?