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If you are considering a franchise business for sale there are some positives and negatives to explore. Buying a franchise business is a great way to go into business but there are some unique aspects to franchise ownership to think about. This article is a simple summary – if you are serious about buying a franchise then you should certainly talk to a lawyer, business broker or other professional to assist you.
Franchising Disadvantages
You don’t have 100% control
One of the biggest issues that entrepreneurs have with a franchise business is the loss of total control they have over their businesses. When you own a franchise business you are part of a group and must agree to follow rules in order to conform to the franchise’s standards. For instance, selling other products or services out of your store may not be allowed. Also, in many instances the lease to the business location may not even be with you, the franchisee – it may be with the franchisor who then would sub-lease it to franchisee. This is something that should certainly be reviewed by your lawyer.
Royalties and Ad Funds
Owning a franchise operation often means paying a royalty on sales. The royalty is payable many times even if the business is not profitable. Franchisors often charge a percentage of sales to go towards advertising fund. While there is nothing wrong with contributing to an ad fund, oftentimes the franchisee has no discretion on how the dollars are spent.
Other franchise fees
Some franchisors charge an upfront fee when you buy the business. Others may even charge a fee for when the franchise business is sold. These fees may run into the thousands of dollars. Review all franchise documents and contracts carefully and understand exactly what your obligations are.
Approval of the site
Some franchisors may need to approve the site where you would like to build a new location. The approval is often at their discretion.
Your business territory is defined
In a franchise business you often have a determined territory that you can trade in. Doing business with potential customers outside of the franchise territory may not be allowed as it may encroach on another franchisee’s location.
Purchases made from the franchisor
Some franchises state that all franchisees must make all inventory purchases through the franchisor – or a supplier approved by the franchisor. Again, this is an issue that relates to not having ultimate control over the business operation.
Franchising Advantages
The business risk may be lower
With a franchise business, the model is usually successful and proven and the concept is to replicate that success over several different locations. Because of this, overall business risk may be lower.
May be easier to get financing for a franchise business
Some financial institutions in Canada may be more willing to lend money to a new franchise business than a non-franchise business. If you are in the Toronto, Ontario area there are many institutions in the city you can talk to about a franchise purchase: the Business Development Bank of Canada, chartered banks and institutions like GE Capital Canada.
Brand equity
When you open a new franchise location or buy an existing franchise re-sale, the business usually has branding in place. This branding and marketing power is a major benefit to buying a franchise business for sale.
Business Support
Buying a business can be a frightening experience. When a business is sold, the new owner ultimately needs to make an entrepreneurial ‘leap of faith’ and this can add to the fear or uncertainty that some business buyers have. A franchise operation typically offers support, training and proven operating systems in place that can reduce uncertainty and promote your chances of success.
If you are looking at the various businesses for sale and think that buying a franchise operation may be right for you, please think about the pros & cons to that. Franchising is great for some people, but not all. Talk to a business broker or an existing franchise owner in your area to get some more information about owning a franchise.
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