Franchising? Why pay franchise fees?

[GT Bulmer]

Why pay franchise fees?

If you are interested in a particular industry and you are going to invest your time and money anyway, why not research it, plan it, build it and name it yourself? Why bother signing up under a franchise only to pay franchise fees?

Of course, if you are looking at an existing operation, already built and running, that's a different story. But if you decide your community needs a Franchise X, why not simply pattern YOUR operation after a national franchise concept and save the franchise fees?

If you provide quality products, variety and great service, who cares if it has a national brand name?

(Just some thoughts; open for discussion.)

GT

[litekepr]

Why pay franchise fees?

If you are interested in a particular industry and you are going to invest your time and money anyway, why not research it, plan it, build it and name it yourself? Why bother signing up under a franchise only to pay franchise fees?

Of course, if you are looking at an existing operation, already built and running, that's a different story. But if you decide your community needs a Franchise X, why not simply pattern YOUR operation after a national franchise concept and save the franchise fees?

If you provide quality products, variety and great service, who cares if it has a national brand name?

(Just some thoughts; open for discussion.)

GT

Do you think another element in that choice is whether the entrepreneur wants to start from the ground up? Or, if they would prefer to start with something that is proven? One advantage is the connections and some built in discounts with bulk purchases for the business. However, when I was a Domino's manager, our stores ordered from a commissary that offered us discount prices. I know a good number of business people who have worked together and formed a co-op sort of setup where they could combine buying power and get their own discounts. Actually, I was helping a group of businesses set that up, but it can get big enough to be another business and then you need competent people to run that enterprise too I didn't like the built in restrictions with a franchise, but being part of a known brand did have some benefits.

Shri

[Kevin Lee]

Why pay franchise fees?

If you are interested in a particular industry and you are going to invest your time and money anyway, why not research it, plan it, build it and name it yourself? Why bother signing up under a franchise only to pay franchise fees?

Of course, if you are looking at an existing operation, already built and running, that's a different story. But if you decide your community needs a Franchise X, why not simply pattern YOUR operation after a national franchise concept and save the franchise fees?

If you provide quality products, variety and great service, who cares if it has a national brand name?

(Just some thoughts; open for discussion.)

GT

Hi GT,

Starting a franchise is like buying yourself a job and inheriting the "recipe for success". In addition, a good franchise in the proper location can translate into a license to print money... so why not?

[RussellWebb]

Starting a franchise is like buying yourself a job and inheriting the "recipe for success". In addition, a good franchise in the proper location can translate into a license to print money... so why not?

I tend to lean towards taking a more independent approach myself. This is because I like doing things my own way. There are plenty of success stories of small businesses that have dialed in there own concepts and marketed their business well... heck... that's how ALL franchisors are born.

I see it as a toss-up really... relating to different personality types. Some investors don't want to think about building their own 'system', and would prefer to hit the ground running at whatever the expense - read franchise fees, royalties, etc.

[GT Bulmer]

Hello, everybody:

Shri said:
One advantage is the connections and some built in discounts with bulk purchases for the business.

A very good point. This is one of the strengths of the franchise or chain concept. Anyone considering opting in to a franchise should definitely consider this aspect before deciding to go it alone.

Kevin said:
...a good franchise in the proper location can translate into a license to print money... so why not?

I agree when it is a recognized (that is, popular) franchise and if the location is right - like a Tim Horton's in the downtown Toronto business district.

Where I think going it alone makes better sense is, for example, in my little town more than an hour from a major metropolis. Here, there isn't enough traffic to support the cost of a Tim Horton's franchise.

It might make sense for an investor looking to capitalize down the road a few years. They can set up and establish the business now, lock in the location, and be prepared for the growth that is inevitably coming to our neck of the northern Alberta woods. But for a businessperson who needs to make money now, a franchise of that magnitude might not make sense.

Why not put the franchise money into setting up a self-named, locally owned clone of the franchise store? And then, in a few years, the self-owned business will be established and might be able to scare off the franchise operation from entering the market.

Russell said:
I see it as a toss-up really... relating to different personality types. Some investors don't want to think about building their own 'system', and would prefer to hit the ground running at whatever the expense - read franchise fees, royalties, etc.

Finances and ability are factors, but I agree here with Russell: it comes down to the personal interests and goals of the individual. If you have talent, drive and vision as a business person, it isn't going to make any difference whether you buy into a franchise or go it alone - you will do whatever it takes to make it work.

GT

[litekepr]

In addition, a good franchise in the proper location can translate into a license to print money... so why not?

I've seen franchise stores in great locations that failed - I don't know that I'd call it a license to print money. People should have a better chance of making it, but its still not guaranteed. Even with the established formula, there are people who won't make it. Much to consider before starting any business - a franchise or a business from the ground up.

I was just thinking about something that I've discussed with people before - what about the potential pitfalls of being linked with other stores with a mega franchise. Say that one Papa John's gave lousy service or served a lousy pizza - there are plenty of people who don't realize different people own and run different stores and some of these will assume that all of the stores have lousy pizza. There are many reasons why different stores can use the same ingredients and the same portioning charts and still turn out a very different product. We dealt with this in the college town I worked in - actually all 3 stores I worked in served some college campus and that means you are dealing with people who have dealt with a wide variety of stores - all under the same company name. The other side of the college issue - is whether they are more likely to order from a store with a familiar name or not. Lots of variables and possibilities to consider.

Shri

[openafranchise]

I have found that most true entrepreneurs will never buy a franchise because they don't see the value of the franchise system.

Bill Gates would probably never buy a franchise right? He created the system, he doesn't want to follow a system.

A Franchise is a system. Bottom line is the bottom line. If you can't see where the name, system, training, support, products, & services will make you more money than opening your own business then open your own.

It is a known fact that 90% of all small businesses close within 2 years.

It is also a known fact that over 90% of all franchises are still open after 2 years.

So franchising may not be right for everyone, but someone must be doing something right to have one open every 8 minutes in the US.

[Kevin Lee]

It is a known fact that 90% of all small businesses close within 2 years.

It is also a known fact that over 90% of all franchises are still open after 2 years.

So franchising may not be right for everyone, but someone must be doing something right to have one open every 8 minutes in the US.

Valid points openafranchise

I think if the barriers of entry were lower, we'd see a lot more small business owners buy into the franchise system.

And in this case, would you say that opening a franchise is high risk with low rewards due to the initial startup costs and on-going royalty fees?

So then would starting your own online business be low risk, high reward?

[jpower]

It is a known fact that 90% of all small businesses close within 2 years.

It is also a known fact that over 90% of all franchises are still open after 2 years.

I would like to see a credible source for the above statement.

[jpower]

Most successful business owners, who develop a franchise program, state that it took them several yers, and perhaps hundreds of thousands of dollars, to figure things out and get to where they are today. Franchising offers the person wanting to own a business the chance to open at the point where the franchisor is today. They may have to pay a franchise fee, but it will likely be much less than the cost of their own learning curve. Additionally, franchising may offer a better chance for ongoing success.

That being said, truly entrepreneurial types normally don't buy a franchise; they have the capability to fiture most things out for themselves. Sourcing, however, as mentioned above, is a strong benefit of franchising. T

Those buying franchises are frequently individuals without a great deal of business experience (although there are exceptions, and multi-unit owners are certainly an exception). Franchise operations manuals are written to the level of a new business owner for whom this may be their first such experience.

[RussellWebb]

Well said John!

[GT Bulmer]

Most successful business owners, who develop a franchise program, state that it took them several yers, and perhaps hundreds of thousands of dollars, to figure things out and get to where they are today. Franchising offers the person wanting to own a business the chance to open at the point where the franchisor is today. They may have to pay a franchise fee, but it will likely be much less than the cost of their own learning curve. Additionally, franchising may offer a better chance for ongoing success.

I appreciate this perspective, John. Some people say, "Why pay such high franchise fees?" and your answer gives the precise reason why.

A talented or confident entrepreneur may be able to clone a recognized franchise concept and avoid the franchise fees, but they may not have the promotional skills or the financing necessary to market and advertise the operation sufficiently to accelerate the brand-recognition process. It could take them years to establish a following to the point where they can successfully branch out.

A franchise gives them immediate brand recognition and all they need to provide is effective and efficient management.

GT