What I Learned During My Experience as a Franchisee
If you are thinking of buying a franchise, I want you to go in with your eyes wide open. So here I will share the pros and cons that I learned. You can either listen to the podcast episode below or scroll down to read. Both have the same content and will help you decide if buying a local small business is right for you!
LISTEN TO THE PODCAST EPISODE
Hey future badass business owners, today I want to talk about franchises and if you should consider owning a franchise. It is important that you discover if a franchise is right for you. So, I thought I’d share what I Learned During My 5 years of Experience of owning my franchise.
Now, before I hop in, please know that every franchise is going to be a little different. For example, some franchises cost more to get into vs others. Some franchise fees are higher than others. Some require you to contribute to the advertising regardless if you get to use it. Some give you more latitude than others.
No matter what franchise you are thinking about, please remember our number one rule, do your research! If you didn’t listen to those episodes, head over to episodes 6 & 7 and make sure you do. Matter of fact, hit subscribe so you never miss an episode and don’t forget to download all the previous ones.
Ok, so let’s dive into what I learned with my franchise years. I’m going breakdown my learnings from my experience into 5 pros and 5 cons and a little in -between.
Tammy Buys a Franchise
So, back in 2008 I knew I wanted to start a small business in my local community. I had been part of big box retailing for 25 years and I thought going smaller would be a blast and I could use all the training and experience I had through the years to create a successful small business.
Not knowing what I wanted to do, I took the opportunity to purchase an existing business that happened to also be part of a large national franchise that has been around for many years. Since I was used to corporate America, I thought it would be great to benefit from a nationally known business name. Besides, who doesn’t love a Baskin Robbins?
During the 5 years I owned this business, I came to develop a love / hate relationship with owning a franchise. Don’t get me wrong, I loved Baskin Robbins and while they drove me nuts at times, I never great to hate or dislike them. And I would still encourage someone to purchase one if the circumstances are right.
But I have a feeling that many franchisees might agree with the pros and cons I had with being part of a “team” under someone else’s umbrella vs being a solopreneur of my own destiny.
The one thing you need to know the most about a franchise is, on one hand you are a solopreneur running your own business but on the other hand, you are constrained rules and regulations of the franchise. This can be a pro and a con as you will hear shortly.
5 PROS to OWNING A FRANCHISE
So, Let’s dive in to the pros I discovered first. You see, owning a franchise comes with several perks and there are definitely some reasons to own a franchise. The sad part is, most of these perks are taken for granted by many franchisees due to not understanding the additional costs they would have if they had to do it all on their own. Here are five things that I think make owning a franchise a great opportunity.
National Brand awareness / Fan Base
Probably the single best thing you get out of a National Brand is the momentum and rabid fans that come along with the name. In my situation, I had grandparents bringing in their grandkids to re-live the same memories they had 50 years earlier. Having folks grow up and then passing along a family tradition creates a rabid fan base that is yours to keep if you treat them right and ensure they get what they come for.
Now, when looking at other franchises, you can probably think of others that are popular or well known. For example, Rotoroter is well known if you have a clog and Subway is the most popular sandwich shop with thousands of locations across the globe. So, having a nationally known brand can be an instant customer attractor.
Heck, some folks are so rabid, they continue to use the services even when there is poor service. For example, our town hates our local KFC yet people continue to crave Kentucky Fried Chicken so they stay open solely due to cravings that people have. Folks will give it a try every month only to be disappointed once again. This is what rabid fans of a brand can create.
They have a Proven Business Model
By the time a business becomes a franchise, they typically will have worked out the systems needed to run a successful business. This is why you will hear them referred to as a “turn key” business. They usually start out as a single location that grew into a healthy company and eventually spun into franchises.
Folks buy into a franchise due to seeing the success of the business in the market place in various areas across the state or country. Bottom line, the business works and you start off with a winning formula. They have figured out how to create sales, how to have a good bottom line and the systems you need. So, this is another great reason buying a franchise is great for you as you will hit the ground running.
Systems / Processes
As part of the proven business model we just discussed, for the vast majority of franchises, the corporate offices have fine-tuned the operating systems to create the processes and systems that work. As I said earlier, they pride themselves on being “turnkey”, ready to go out the box.
Before they roll out new programs they tend to test them in certain locations to ensure they dial in the process. They create systems that are easily duplicatable. This makes it easy for you the franchisee to roll out quickly within their store. McDonald’s is great at creating repetitive processes any teenager can learn for example. This saves a new franchisee the headache of trying to create these processes.
Bulk pricing / Cost leveraging
Leveraging the power of the franchise is crucial for getting the best pricing. Because a large franchise can pull together 100 – 2000 locations, they can easily partner with suppliers to get the best bulk pricing. The more a distributor can sell at one time, the lower the cost they can pass along to the franchisee.
While at times as a franchisee you felt the sting of prices going up on your costs of goods, one can only imagine how painful those increases would have been had you been a small fish in a big pond with no leverage. Especially since most price increases are due to market conditions that are across the board and would bite you whether you were a franchise or not. For example, when I owned my ice cream store, milk prices went up and the cost of ice cream went up. This would have happen with all ice cream producers.
Signing / Marketing
Signage can be very pricey. Not to mention the talents and skills needed to create advertising that is catchy and meaningful. I remember one of ours that still rings in my ears….” Ice cream and cakey cake…. ice cream and cakey cake.” Sorry, I digress.
Some would argue that you pay for these marketing items with your advertising budget and this is very true. But as a small business owner, many would never be able to hire a high-end marketing company to develop this stuff. Not to mention the high-quality signs that you are usually given for your location.
While in a few minutes we will discuss a con in this same area, I must give credit when it is due, and the marketing materials with most franchises are top notch. Some of the national advertising is fun and can be a powerful word of mouth for your business.
5 CONs to OWNING A FRANCHISE
As with any business, there are cons to owning a franchise as well. Things that will drive you absolutely batty. I know for me, most of these cons are the reason I personally would not own another franchise. But for some folks, they might find my cons are actually pros for them. But for my personality type, these are what I didn’t particularly care for.
Not Much “Out of the Box” Thinking / Limited Creativity
Having spent the vast majority of my business career being encouraged to think outside of the box and find ways to create business and new ways to drive sales and profit, I found the heavy structure of a franchise to be frustrating. I understand it is crucial for a franchise to have the “sameness” from location to location to create the national brand, but for me, I really struggled with the limited opportunity to try new things. I’m an “ask for forgiveness” type of person not a “get permission” type.
If you are someone that likes to try new things and be creative, you might find this limiting for you. You will want to check with your franchise of choice on how much must be by the “book” and how much you can try things. Some are more open than others. But if it is a big national chain, don’t count on much wiggle room. Now I’m not saying you won’t have any, but for those who color out of the lines, you will be frustrated regularly.
Are You Truly Your Own Boss?
This one ties into the previous con. With a franchise, you are being told what to buy, how to merchandise, what to price your products, and how you must do it. Sure, you still get to pick your team and be involved as a leader in your community, but your ability to “just say no” isn’t always possible.
I especially found this with equipment purchases. Some items I didn’t believe would have a return on investment (and they didn’t) and some I agreed with (like a new register system) but I would have planned out their purchase vs doing it when I was told, especially when it would cripple me or go against my debt free philosophy.
I had purchased my business debt free. The only liability I had was my monthly lease. Shortly after taking over my store, I was required to purchase a $7,000 piece of equipment I didn’t have the money for. So the only option was debt. Later this register system was required and before you knew it, I went from debt free to $10,000 in debt. Had I not been a franchisee and it was required in my franchisee agreement, I never would have made either purchase at the time I did. I would have planned for them much differently.
Advertising on a Larger Scale vs Locally
Earlier I mentioned one of the pros to owning a franchise, was the advertising and marking that comes with being a national brand. While this is a pro on one hand, the con side is, the majority of this advertising goes into larger markets and not so much to your local community. I was outside of the Phoenix market, so this was a huge issue for me.
Very little of this advertising made its way to my community. While I paid the same percentage into the advertising pool, I had the least benefit and impact from it. So, I ended up having to spend above and beyond my advertising budget to ensure I had a strong local presence. This can add up quickly and impact the bottom line since you are paying twice as much. For example, I had to pay to be in our local coupon paper and other local advertising, that I knew my community would see.
At our franchise meetings, I will tell you that we would spend probably half the meeting with franchisees moaning and groaning over how much they spent on advertising and how little bang they got. They felt their money went more national vs local. Myself and the other remotes would just shake our heads as we benefited even less plus spent an additional $200 – $300 a month on top of it.
I’m going to tell you what I often times told the other franchisees, the Franchise needed to make sure they protected the national brand so they were going to make sure those marketing dollars to the largest markets and the national campaigns first and foremost. And if you recall, one of the biggest pros is that national brand so it is a catch 22. You can’t have both and you need a strong national brand franchise.
Limited Pricing Adjustments
Franchises come with a suggested price structure. While there is some limited wiggle room to raise or lower your pricing due to your location, there are many times you are stuck doing national campaigns that just do not make sense.
Sometimes you either just don’t sell those products and sometimes you are giving away profit in something that is just plain stupid. I grasp the concept of “lost leaders” and just getting folks in the door, but there are times that no one has done the math and you are losing profit in the quest for sales only.
I remember one item in particular that we ended up giving away 50% more product for a 16 cent profit! Who on earth would give someone 50% more product and only make 16c? This was made worse as it was a 12-month giveaway that ran annually. In no universe is it smart to cut your customer return rate in half for a whopping 16 cents. My goal is to get them to come in more often not half as much.
Cost to Your Bottom line – Royalty Costs
This one isn’t just about giving up part of your profits. In some cases, it is about what you are buying for those royalty premiums. Each business is different. But for many, you will pay something like $25,000 for a 10-year contract. Then on top of that, you will give up 5 – 10% of your profits monthly for the right to use their brand.
Let’s say you do a million dollars a year, then you are giving away as much as $100,000 off the top to the franchise. So, now your expenses and operating costs are based off 90% of sales.
Now, if this brand is so popular that you would never be able to start a similar business making the same sales and profit, then this cost might be a great investment but if it doesn’t, you might want step back and run the possible numbers. What comes to mind are popular fast food joints. Obviously, you aren’t going to do McDonalds or Burger King kind of sales without their name brand.
Please keep in mind, this cost covers quite a bit – brand recognition, reduced costs of goods, advertising, etc (like we have been discussing). But for some types of businesses, unless they are major players in your market, you could probably create the same sales doing it on your own.
Is Owning a Franchisee Right for You?
While I don’t regret the learning experience, I would probably pass on owning another one unless the upside was worth it. I am the type of person that loves control. While the perks of the franchise are great for many folks, for me personally the business person inside of me wants to create and take chances.
A franchise is great for those who like to run their own business but have someone else put the processes in place and drive the business for them. This didn’t work for me since I wanted that control I mentioned. For you, you might find the complete opposite. Trust me, in our franchisee group, there were plenty of folks who loved all the things I hated.
We are all different, so you must look inward and ask yourself which camp do you belong to? Do you want the autonomy to tweak and take chances? Or do you want to follow the status quo and trust your brand’s proven method?
Both are right depending on your goals and objectives. The key is to know your true self and what makes you happy and excited. There is no right answer that fit all. Be true to who you really are and what your style is.
I really encourage you to speak to existing franchisees with the business you are thinking of joining. As them the tough questions. Try and get them to tell you the good, the bad and the ugly of being a franchisee. What do they love about it? What do they hate about it? What frustrates them the most?
Don’t forget the number one question you should ask… “If you could do it all over again, would you?”
When future franchisees would meet with me, I would be honest with them that I probably wouldn’t have. Not necessarily due to the franchise, but more that the model didn’t work in my small town the sales level I was. I needed a better ability to tweak my model to make money. It I was in a different market, who knows, I might have a different opinion but honestly, I don’t think I would. I need that ability to think outside of the box. I was trained that way from my time with Home Depot, so it was too far to the right of what I was bred to do.
So if you are thinking of buying a franchise, do your research. If you think you could live the pros and cons I mentioned and you have ability to pay the franchise fee to get going, then I say go for.
But personally, I think most of you can forgo the national brand in your community and be just as successful by building a business with excellent service, high quality and smart business practices.
Don’t forget that once you get your business going, start listening to the Local Small Business Coach Podcast for even more tips and resources to increase your profits, boost your sales, improve your processes and develop stronger teams.
By the way, if you either own a franchise now or in the past, what has been your experience?
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