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12 Reasons to buy a franchise.

A Franchise is an arrangement in which the franchisee buys the right to sell a product or service from the franchisor. It is this right to sell a product or service that is the franchise.

Types of Franchise

There are two types of franchise. Product and trade-name franchises and business-format franchises.

Product and trade-name franchise

Auto dealerships are product and trade-name franchises that sell products produced by the franchisor.

Business format franchises

Many Fast Food businesses are Business Format Franchises. They usually include a complete package with everything you need to start and operate a business. "Everything" means the design of the building, Management Support, product, trade names, procedures and standards.

Benefits of a franchise

  • A reputable franchise has a proven business model.
  • Franchising minimizes risk. Products, marketing, operations and managements have been proven by others.
  • Quality franchises have a higher success rate than other types of businesses.
  • Name recognition. The business name provides an immediate competitive advantage because customers already know the name.
  • Financing. Most franchises provide finance or help the franchisee to obtain finance. Financing a franchise is easier because the proven business model lowers the lender's risk.
  • Site selection. Most franchises assist the franchisee to select a new site.
  • Training. The Franchisor provides standard training programs covering all aspects of the operation.
  • Support. Franchisors generally provide managerial support and problem solving capabilities.
  • Economies of scale. Bulk purchases by the franchisor deliver cost savings to the franchisee.
  • Marketing. News about the franchise in other parts of the nation or world raise awareness about the local business.
  • Advertising. Cooperative advertising programs provide state-wide or national exposure at lower prices.
  • Franchises combine many of the benefits of business ownership with the brand name, experience, and economies of scale provided by the established franchisor.

    Franchising also has drawbacks.

  • Franchise fees. Substantial up-front franchise fees can range from a few thousand dollars to hundreds of thousands of dollars.
  • Royalties. Many franchises includes a monthly royalty based on a percentage of the franchisee's income or sales, even if the business is not profitable.
  • Loss of control. Franchise agreements usually dictate operating standards, leaving the franchisee with less control.
  • Required purchases. The franchisee may be required to purchase some (or all) materials from the franchisor, in order to produce uniform products.
  • Termination clause. The franchisor may retain rights to terminate the agreement under certain conditions.
  • Lack of freedom. The franchisor controls many, if not most aspects of the business.
  • Higher capital investment. Lowered risk comes at a price.

    Your job, when doing your due diligence investigation, is to discover all the pros and cons of the particular franchise you are investigating. Then, armed with all the facts, you can make a decision. Failure to properly complete a due diligence investigation and analysis is a major reason that a business can fail. You owe it to yourself and your family, any time you consider buying a franchise, even though they can be one of the safest businesses to buy.

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