Starting any business is risky.
Within the first year, 20% of small businesses fail. The following year, another 10% will fall by the wayside. By the end of year 3, 40% of owners see their business collapse. After that, there is a steady failure rate of around 5% until, by the 10th year, 66.4% of new businesses are dead in the water.
These scary figures come from the US Bureau of Labor Statistics.
But what if you can buck the trend? What if there was a way to ensure that your investment in a new business is safe and secure? Well, you can by putting your hard-earned money into a franchise. The figures from a study conducted amongst franchise owners recently showed that over 90% survived after 2 years and 85% survived after 5 years.
So, what are the advantages and disadvantages of investing in a franchise?
Advantages of Franchising
Franchises are a known quantity. They have systems and standard operating procedures that are tried and tested. Businesses within the franchise network have a proven formula that works. And depending on the type of franchise you purchase, you essentially get a turnkey business with all the requirements in place from day one.
Rather than starting with zero publicity and public awareness, franchise businesses have a public profile. Your potential customers are already aware of the brand. Your clients want to deal with a reputable company and franchises provide the level of professionalism and trust that only comes from being in business for many years.
Franchises have buying power. Because of their large network of stores or locations, franchise owners get to benefit from the power of volume. With the backing of a large franchise organization, individual business owners get to enjoy the benefits that are normally only available to much larger organizations.
You’ll get to enjoy higher profits, as the franchise is already set up with the right margins in place from day one. You won’t have to test the market and find the perfect profit percentage for your business as it is already done for you.
Because all the risk factors have already been taken into account, your investment enjoys a lower risk than a new business with no track record. As we see above, new businesses are particularly vulnerable in the first 5 years of their lives. A franchise owner has a much better chance of making a success of their business than non-franchise business owners.
Disadvantages of Franchising
While there are many positives to buying into a franchise, there are a few things that you need to take into account to ensure that it is the right investment for you.
Most franchises come with a long list of restrictive conditions. These rules and regulations are designed to give a business the maximum chance of succeeding and are based on experience and professional management expertise.
If your personality is not suited to following the rules, then you may struggle to adapt to this business environment. While you may feel you know better, the franchisor is the arbiter of what can and cannot be done with your franchise.
Here are a few of the things you may have little or no control over:
- Advertising and marketing
- Resale conditions
- Business location
- Hours of operation
The initial cost may well be higher than if you were to go it alone. However, the franchisor will have calculated exactly what you’ll need to meet your obligations. It is also good to remember that the franchisor needs you to do well. If you are a success, then they make more money and both parties win.
While not all franchises require ongoing financial investment, others may require that you pay royalties, training costs, and advertising expenditures. You may also be required to upgrade shop fittings and billboards after a certain number of years.
Lack of Financial Privacy
Depending on the franchise agreement, you may have to present your financial statements to the franchisor regularly. If you don’t wish for anyone to know how well or poorly your business is doing, then this can be a stumbling block for some investors. This openness is not a bad thing though, as it allows the franchisor to offer timely advice if things are not going quite as well as you might have hoped.
But what if you could reduce the negatives and take advantage of all the positives that come from owning a long-running, successful franchise?
Moses Nae, CEO of TaxLeaf, Contador Miami, and the founder of Contador America is passionate about helping business owners and investors maximize their returns.
It is crucial that you consult with a knowledgeable and experienced accountant to help guide you through the various stages of your franchise investment, especially if you are looking for ways to maximize your income.
Here’s what one of our successful business owners has to say about the service and support they receive from being partnered with TaxLeaf:
Cesar Buenavista, Doral, Fl
“I am an Account Manager with TaxLeaf and have been working with clients for more than 6 years. The technology they provide is incredible. I have access to everything from my phone if I need it. They are very professional and provide excellent support for me and my employees.”
To help you learn more about how TaxLeaf can assist you with investing in a franchise, stop what you’re doing right now and click the link below.
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