Are Franchises good investments?

Answer 1

They can be it depends on what kind of type of franchise it is. If its something like a cleaning franchise like jani king then, no. Because thats something you can do yourself, but if its something like a resturant or a store then I would. The reason I say this is because some business can be started with out a lot of start up money, so if you can do it on your own then do so. Because owning a franchise is like a partnership and they like you to run your business they was they think is best. So choose the right franchise.

Answer 2

Like most business questions, the answer to this one is "it depends." It doesn't have much to do with whether you can figure it out on your own. The value of a franchise lies in the support and benefits they can give you that you would otherwise have to do yourself (and might not want to do). If they are offering you something you really want, it could be worthwhile. For example:

Brand awareness/equity - building awareness for your business can be time consuming and expensive. If they already have a well-established name in the business you are getting a leg up. Brand equity means the value people place in the name (i.e. Volvo stands for safety) which can benefit your business by creating an image in their minds before they even call you.
Marketing support: coming up with an effective marketing plan with well put together ads and promotions is very challenging. If you get with the right franchise, they may help with this. Not all businesses require such support, however.

Operational support: do they run a well known website that funnels leads to franchisees? Can they help you with the management of the details like finance and accounting, hiring/firing people, etc.

Product quality/specifications- using a proven formula for products and services can cut out a lot of the learning you would otherwise have to do on your own. Just be sure it is truly something valuable.

Real estate and other support regarding assets purchased: have you ever built your own restaurant from the ground up? How do you know what features your delivery trucks really need? You might be just fine if you do know these things, but a good franchise can help you with everything from site selection to finding the right cash registers.

But if you just want to be a smal shop in a small market where you can drive the business yourself there probably is no need for all those services. I've known handymen who could keep perfectly busy on their own but sign up for a service like Handyman Connection since they will field all phone calls, manage their schedule, handle billing, etc. Could they do it themselves? Yes. But it frees them up by not doing so and that has value. Determine what value you need from others and then you can see if a franchise is a good option.

Answer 3

As QandA guy rightly states, "it depends". There are many good franchise opportunities as well as bad ones.
Whether it’s worth investing in a franchise can only truly be answered after the fact. The best way to assess whether to buy any franchise is to speak directly with several (at least six, preferably more) franchisees for the company you are considering. A self-examination as to whether owning a business is what you really want is also essential, as is a very thorough due diligence. There are dozens of things to investigate when considering investing in a franchise, but here are some fundamental questions to ask current franchisees:

About how many hours per week do you dedicate to your franchise business?

How would you describe your relations/communications with your franchisor?

Is the franchisor fair with you in resolving any grievances?

Are territories equitably granted?

How would you describe the initial and ongoing training provided by your franchisor?

In what ways could the parent company most improve?

Is your income A) more, B) less or C) about what you expected prior to opening your business?

If you could turn back time to the day you signed your franchise agreement, would you make the same decision to buy your franchise?

The last one is of course the most important. There are many very happy, wealthy franchisees out there, but it's not a guaranteed formula for success. Every opportunity is unique and requires extensive due diligence of both the franchise itself as well as the regulations governing the industry. As you evaluate companies, consider only those companies whose owners say they purchased:

A higher chance of succeeding than if they’d opened their own business independently

A turn-key operation

Training that assures you’re ready to manage all facets of the business

An effective plan to market and sell products and services

A network of expertise for you to work with and benefit from

A business from a franchisor who makes a genuine effort to help them be successful

Here are some disadvantages to franchising:

Any franchise agreements you sign will be inherently one-sided, favoring the franchisor. They are likely to place strict controls and expensive standards on you and your business, from how it appears, to the products you sell, to the
territory you operate within.

Many franchisors will neglect your business shortly after you’re up and running. The most common statement of the franchisees in the Kowalski book referenced below is: “My franchisor is more interested in selling franchises than in supporting the existing franchisees.” Be careful, especially when dealing with a company that has lots of franchisees with multiple locations. These people will probably be well taken care of, while those with only one location may also be, but possibly to a lesser extent.

Most franchisors demand royalty payments as a percentage of gross income, whether you’re making a profit or not. If the franchise demands a royalty for national marketing, make sure you’ll stand to benefit from it.

Once you sign your franchise agreement, you will be held accountable for honoring your commitments. On the other hand, the franchisor, which holds most of the cards, may change the terms periodically, and there will be little you can do about it short of forfeiting your franchise.

Even if you’re franchise is successful, you may find when it’s time to renew your franchise agreement that either you’re not offered the option, or that you’re precluded from renewing by new, more onerous stipulations.

You may be hard-pressed to transfer or sell your franchise if you’ve had enough of running it, are making only a meager return on your investment, or you become incapacitated.

Poor quality or service standards of other franchise locations may effect your own reputation for quality, and you may also be responsible for warranting the work of other locations. For example, let’s say you’re a franchisee of XYZ Transmission Repair. A customer whose vehicle was improperly repaired at another XYZ location 20 miles away may come to your location to have the problem corrected, and may expect it to be corrected at no cost.

Here's some other information that may help out:

Most franchise contracts are 10-year commitments for which the franchisee has virtually no rights. They're structured such that the franchisee has very little latitude or say in how the business is operated. You have flexibility to hire your staff, manage them and set your own prices, but most everything else, from displays to products you may/may not carry to signage/advertising, equipment, technology, etc. is usually either governed by or subject to the approval of the franchisor. It's not like owning your own business, it's more like being a store manager who, if the business is profitable, takes home most of that. And if the business is not profitable and you want to sell it or close it after five years, these are both very difficult to do. The former is usually via either a very large fee (an example is a local franchisee who paid $100,000 to terminate his franchise contract with one of the more popular women's fitness center franchises) or personal bankruptcy (franchise contracts generally require you that you be personally liable your business debts, not just through whatever type of corporate entity you might establish; e.g., LLC, S Corp., Partnership, etc.). The latter option of selling your franchise is generally accomplished only at a very large discount.

Here are some survey results that may help in deciding whether to invest in a franchise. All answers from current franchisee owners:

48% of franchisees are making less income than anticipated prior to opening their business

30% would not buy their franchise again, were they able to turn back the clock to the day they signed their franchise agreement

19% do not feel their franchisor equitably grants territories

And some insight from Scott Shane's book:

“…despite the widespread reach of franchising, surprisingly few companies succeed at franchising. In fact, of the more than 200 new franchise systems established in the United States each year, 25% don’t even make it to their first anniversary, approximately three quarters fail within a decade, and only 15% make it to 17 years.”

Good luck!