The Pitfalls of Franchise Ownership

Many of the clients Second Wind Consultants has helped out are franchises. Over the years we have seen just about every type – fast food, ice cream, sign companies, automotive, hardware store’s, and in just about every situation one of the main problems with the business is not just that they have too much debt, but also that a large portion of the business’s revenue is cut right off the top line by the franchisee.

There are certain advantages to owning a franchise. For the larger franchises, brand recognition can be very powerful and will drive clients to your store. Advertising and promotional materials are often supplied, which would cost the independent entrepreneur far more to obtain for himself. Yet from my experience in turning around and working out small business franchises, there are far more drawbacks than benefits.

The first and most glaring drawback when it comes to owning a franchise is the fact that the royalties paid to the franchisor are often taken as a percentage of gross revenue. That’s money directly off the top line of the business. This can range from 3% to as much as 9%. If the business would otherwise be breaking even or just making a small profit (as many are today) that royalty fee is going to keep the business running at a loss each month. When those payments become too much for a business to survive, they may get some relief, yet always with the expectation that it will be repaid at a future date.

I also often hear the story from my clients that they were “promised the world” from the franchisor when they were thinking about acquiring the business. False expectations and aggressive sales tactics on the part of the franchisor often lead to a business not being able to handle the tough times that challenge any small business owner. Also, inflated future sales projections and expectation on the part of the franchisor has led to many franchisee’s taking out loans that the business are unable to support.

Walking away from a failing business can also be extremely difficult as a franchisee. A franchise agreement is required in almost all cases, and these can be as difficult to break as a lease with a landlord.

Bottom line – owning a franchise can have its benefits, and many owners experience successes. Yet there are several glaring pitfalls that a business can succumb to, which should be carefully examined before becoming a franchisee.