Franchises vs. Independent Businesses: What Makes a Franchise Successful
August 18, 2023When it comes to whether you are more likely to be successful as a franchisee than owning an independent business, studies have gone in both directions over the years (and as far as we know, there has not been any recent study on the question).
How successful are franchises? Success depends on the type of business involved, as well as who the franchisor is and what sorts of services they provide to franchisees. That said, franchisors often tout certain benefits associated with franchising as opposed to opening an independent business.
Three Considerations for What Makes Successful Franchises
For analysis, our experience as franchise attorneys has led to the following ruminations.
1. Proven Model
Franchisors and franchise brokers often market franchise opportunities by focusing on the fact that there is a “proven model.” This is not always the case, however – at least in any meaningful sense. A newer franchisor, for example, may have operated a very successful corporate location for years, but that does not mean it will translate into success for a franchisee. Corporate-owned locations, for example, often have fewer expenses than franchisees, giving them more capital to spend on marketing. Moreover, what works in one area may not work in another – an Italian ice business, for example, may have a model that works in Arizona, but that model may not translate to colder weather climates like Minnesota. If the model does, in fact, work, then a franchisee may be more likely to succeed than an independent business owner, but that is a big “if.”
Prospective franchisees should speak with as many operating franchisees and former franchisees as possible, using the list provided as an exhibit in the franchisor’s disclosure document, to find out whether the franchisor’s model is indeed well-formulated and resulting in franchisee success. Prospective franchisees should not look at the number of new franchises a franchisor is establishing as evidence of success. Rather, the measure of success should be how happy the established franchisees are with the franchisor, its system, and its ongoing support, and what former franchisees have to say about the system.
2. Trusted Brand
Prospective franchisees frequently believe that they are buying into a trusted brand. This belief is not always true. In some instances, a prospective franchisee may buy into the hype even when a franchisor has few locations and little brand recognition. Of course, everyone knows the McDonald’s brand, but there are franchisors that jump into the franchising world with little to no brand recognition at all. A justification for paying initial franchise fees and royalties is that the franchisee is getting to use the franchisor’s brand. Prospective franchisees, however, must be careful in evaluating whether or not the use of the brand is going to benefit them or be worth the costs associated with becoming a franchisee.
3. Support and Training
Marketing materials aimed at prospective franchisees often tout the support and assistance that a franchisor will provide. There are franchisors that do provide such valuable assistance and training, but franchisees are frequently surprised to learn that the franchisor generally has very few (if any) obligations to provide ongoing support after the franchisee opens for business. So while support and assistance is there in some cases, in others, the franchisee may get no support or assistance and the franchisor will still be in compliance with the franchise agreement and entitled to ongoing royalties. In other words, prospective franchisees should not count on ongoing support from the franchisor to be successful and should pay close attention to the franchisor’s actual obligations in the franchise agreement.
Get Legal Peace of Mind
If you are considering buying a franchise, the attorneys of Garner, Ginsburg & Johnsen, P.A. know what makes a franchise successful from a legal perspective. If you want peace of mind, hire our experts to review your Franchise Disclosure Document and Franchise agreement for one flat fee while also getting time built in for a consultation of negotiation with the franchisor. Schedule your consultation today.