Ask any small business owner and they will tell you that, as rewarding as it can be, running your own business is extremely hard work. Long hours, complete accountability for success or failure, and often a deep and abiding emotional tie to the enterprise make owning a small business far more than just a job.
Franchising is a form of small business ownership that carries with it characteristics that distinguish it from an independent company. As a franchisee you are granted the right to use a franchisor’s trademark and business model and sell its goods or services in exchange for a fee. Some see advantages to this over owning an independent business such as lower costs, substantive operational resources, and working with an established brand. However, running a franchise also brings many challenges.
Fundamentally Unfair Contracts
Prior to signing any contract, franchisees should carefully examine all provisions to ensure that they are not agreeing to stipulations that create unfair operating circumstances for them. Conditions to watch for include franchisor release of duties or liability under applicable federal or state laws, gag rules, post-term noncompetition covenants, and franchisor right to unilaterally amend the agreement.
Intra-Brand Market Encroachment
In franchising, the risk of market trespass can undermine franchisee ability to maximize profitability. This can take a few forms, such as another franchisor unit opening right down the street, a virtual trespass via the Internet or e-commerce, and franchisor development of alternative distribution pipelines (e.g., supermarkets, workplaces, or military bases).
Restrictive Supply Sourcing with High Prices
A franchise might find itself forced to purchase supplies from the franchisor itself or from a specified group of vendors approved by the franchisor. Although these vendors may obtain this status through kickbacks or other considerations, it is possible that those are not passed down to the franchisee. This is costly to franchisees and has the effect of blunting the kind of competition that fosters economic growth.
Bound by the parameters set forth in the agreement, franchisees must run the business in a particular fashion regardless of the market conditions. Further, if you jumped into an industry without a true sense of its growth potential or intrinsic appeal to you, work that initially seemed exciting could grow stale after a few years. What might have appeared to be security could actually be an absence of independence.
The Competence of the Franchisor
Not all franchisors run sound businesses. This can translate into a lack of material or financial support, deficient services, or even offering a business that hasn’t been proven to be franchisable. There is also the possibility that the franchisor is unethical, looking to make a quick buck by selling franchises to eager beavers.
Do Your Due Diligence
Franchising could be a wonderful way for you to operate your own business. However, you want to give great consideration when it comes to selecting a franchise to avoid trapping yourself in an unsatisfying situation with potentially long-term negative repercussions.