Does Buying a Franchise Make You an Entrepreneur?

I’m a serial entrepreneur. I love starting, building, and selling businesses. It’s the challenge, I suppose, and the rewards of watching all of it grow: revenue, people, systems, market share, value, and so on. Plus, I’ll admit, I really don’t know any other way. This has been my life nearly 30 years.

And I just did something I never thought I’d do. I bought into a franchise! I will tell you why a little later.

What about you? Have you thought about it? Maybe you’ve heard this saying: “Owning a franchise allows you to go into business for yourself, but not by yourself.” Does buying a franchise make you an entrepreneur? Or must you start it from scratch and figure it out along the way? Let’s look at it.

Franchises have a lot of advantages over starting a business from the ground up. Consider:

• It’s a “business in a box” concept – systems, designs, operations – all done for you.
• Brand recognition – franchises carry more widespread brand recognition than a one-off startup. Customers know what is offered and what to expect consistently.
• Proven operational systems and organizational design reduce hiring mysteries and mistakes.
• Volume purchasing agreements can get you lower costs on FF&E (furniture, fixtures, & equipment), supplies, insurance, financing, etc.
• More sophisticated benefits are available because of scale: Human Resources, marketing, training, financing, etc.

Important support before you even open your doors, like:

• Sophisticated site selection based on proven traffic studies, demographics, etc.
• Design, construction, and signage templates
• Specialized financing tailored to your needs
• Training for you and your people
• Grand Opening instructions, media coverage, etc.

Important support as you grow, like:

• continually updated training programs
• national and regional advertising
• operating procedures and help
• management support and advice
• industry, legal, and regulatory updates

Again, that statement: “Owning a franchise allows you to go into business for yourself, but not by yourself.”

But – (you knew this was coming) – there are some disadvantages that may not suit you:

• Substantial initial franchise fee. You’re paying for the proven system. $10K - $1 million!
• Monthly royalties, usually revenue-based, forever.
• Marketing fees that may not get spent back in your region. I had a friend with a carpet-cleaning franchise who complained loudly about this.
• Corporate marketing may be adverse to your profits. One friend of mine owns several franchises of a popular restaurant chain. National media advertising is pushing an expensive burger on which his profit margin is lower, but franchise fees are paid on total revenue. Think about that one for a second.
• Mandates from the franchisor – location, appearance, uniforms, products, inventory, pricing, training, store hours, equipment, signage, and so on.
• Not complete independence. Must operate business according to the procedures and restrictions set forth by the franchisor in the franchisee agreement.
• Must meet performance metrics and requirements. Your franchise could get taken away for under- or non-performance. There have been lawsuits against the parent company for 7-11 on this topic.
• Could be difficult to sell your business based on franchisor requirements.
• Your own business’ value could be damaged by the franchisor’s brand damage. This happened in 1993 with Jack in the Box restaurants involving E.coli bacteria. E.coli poisoned some customers, and the negative publicity did a great deal of harm to not only Jack in the Box, but to the franchisees as well – even those miles away from where the problem occurred.

So there are some pros and cons of buying and operating a franchise.

With all this said, you might be wondering whether franchises are less likely to fail than non-franchise startups. In my research, I couldn’t find any hard data that confirmed this.

A franchisor may tell you this, but it’s likely more sales pitch than fact.

They’re about the same, according to the US Small Business Association. Bruce Williams, a business broker, lists franchise failures according to SBA loan defaults.

So why did I buy one? Several reasons:

1. I could afford it.
2. It was in an industry I don’t know much about, but I could see an exciting shift coming.
3. I’m in with two great business partners who DO know the industry, and had “been-there-done-that.”
4. There’s no owner/manager requirement, and it’s a semi-passive investment for me.
5. I was astonished how much demographics research, knowledge, and care went into picking locations.
6. Ongoing monthly royalty fees are reasonable.
7. I expect minimal hassles if and when we decide to sell.
8. My return on investment met my decision criteria.

Is it right for you? First, look at YOURSELF.

• Are you comfortable with structure and rules?
• Do you come from a large company?
• Can you afford initial franchise charge?
• Do you want to run a business of your own but with minimal risk?

If you answered yes to all four, then yes, check out a franchise!

How do you choose one?

• Pick one in an area in which you have a genuine interest or passion.
• Research the franchisor’s reputation.
• Talk to some existing franchise owners for their opinions and input.
• See if their owner/operator metrics meet your expectations.
• Understand fees, performance metrics, and what the franchisor is promising to do for you.
• Understand what it takes to sell, if that becomes something you want to do down the road.
• View franchise ownership as a long-term commitment to a corporate partner. As goes the franchisor, so goes your business.
• Hire a good franchise attorney to translate the contracts, like my friend Josh Brown of Franchise Euphoria, where I recently interviewed on his podcast.

So back to the original question: “Does buying a franchise make you an entrepreneur?”

Well, the first thing I say is to forget the label, because it really doesn’t matter. Look at what you’ve done:

• You’ve assessed a market.
• You’ve found a solution.
• You bought the system. (In business, you either have to buy it or build it.)
• You’ve take the risk to go out on your own, and run your own business.
• You’re self-employed, motivated, and growing a business.

That’s entrepreneurialism in my book, any day.

Any franchise owners out there? What would you advise? What mistakes did you make? Thinking about buying one? I’d love to hear your opinions or questions.

Make it a great day! -- Rick