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Franchising vs. Owning Your Own Business — pros and cons

Question: My husband and I have many years of experience managing restaurants for a local franchisee of a prominent restaurant chain. We have been able to save some money and now wish to open our own restaurants.

What are the advantages and disadvantage of acquiring a franchise as compared with opening an independent “mom-and-pop” restaurant?

Answer: Before reaching a decision, it is important to understand the basic concept of franchising.

In counseling clients, I often compare franchising with “renting” someone else’s concept, including the right to use the franchisor’s trademarks, secret recipes and things of that nature.

In exchange for these rights, a franchisee typically is required to pay a license fee of thousands of dollars up front and ongoing royalties. Royalties typically are based upon sales, not profits. Thus, even if your franchise is not profitable, you still will be required to pay a royalty to the franchisor.

Advantages vs. disadvantages

The advantages of franchising are fairly obvious. For instance, if the franchise is a well-known chain with a good reputation and a popular product line, the instant you open your doors, you likely would have a significant customer base that you would not have with an under-established name and unknown products.
Also, the prominent franchise chains typically benefit from considerable advertising placed by the franchisor for the benefit of all of the franchisees throughout the chain.

Conversely, various disadvantages of franchising exist.
An important initial concern is whether franchising provides franchisees any added value compared with what the franchisees could do on their own.

For example, if a potential franchise is neither a well-known chain nor offers any especially valuable “secret recipes,” what benefits would be gained from paying the license fee and royalties to obtain and maintain that franchise?
Perhaps it might be an “up-and-coming” franchise chain, and it might be beneficial to get in on the ground floor.
But because of the added expenses associated with franchising, a hasty decision should be avoided.

Total conformity
Although a franchisee is an independent owner of a franchised restaurant, a franchisee does not enjoy the freedom associated with operating a local restaurant unaffiliated with any franchise chain.

Franchise agreements impose considerable responsibilities on franchisees to operate their facilities in total conformity with the expectations throughout the franchise system, including control over menu items, the decor, signage, advertising and all other aspects of operating the franchised business.
Franchisees are required to submit to periodic “quality control” examinations, and if the franchisor has concerns, the franchisee might be required to alter its operations.

Also, if the franchisor decides to alter the “appearance” of the restaurants throughout the chain or the logos used on signage, the franchisee can be required to make the changes.

Another important concern is if the franchise relationship deteriorates, it usually is not possible merely to withdraw from the franchise system and then to begin operating your restaurant as an independent entity.

Franchise agreements typically have a requirement that once the franchise relationship ends, the franchisee is not allowed for a period of time, perhaps a year or two, to operate a business of the same sort in that market.

Realistic expectations
The major concerns of whether to turn to a franchise relationship are whether any value is added by joining the chain, whether the franchisee is willing to accept the control the franchisor will have over the operations, and whether there is a realistic expectation that the franchisee will be fairly treated during the term of the franchise.

Franchise agreements impose considerable responsibilities on franchisees to operate their facilities in total conformity with the expectations throughout the franchise system.

By: Jack A. Wheat http://www.bizjournals.com

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