January 28, 2023

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When Franchise Ownership Loses Its Luster

When a new entrepreneur decides to invest into a franchise, he or she may do so with “stars in their eyes”, as the saying goes. With the support of a strong franchising company and a big name brand the future may seem wide open. Obviously, the new investor sees the value inherent in franchising and the worth of the long term financial commitment to the franchisor.

It is a lot easier to see the worth of those ongoing royalty and advertising fees at the onset when the franchising organization is very involved in helping establish the franchise and train the owner to successfully operate it. However, as time goes on and the franchisee begins to feel more confident in his or her ability to run a successful business without the safety net of a bigger corporation and brand name standing behind the business, that enthusiasm may fade. To minimize the change or regret further down the road, a prospective franchise should make sure they really understand what they are committing to.

Buying a Name

First and foremost, even if you strip away all of the support and other benefits that come with franchise ownership, the most valuable asset that a franchise owner gets from his or her contract is the use of a name. A good brand name is worth the franchise’s weight in gold. It is that familiar and respected name that draw in the customers that independent owners have to really work to get.

Not only does starting a business under a brand name help start the business off on a stronger footing, but over time it continues to be a boon, bringing in new members of the community and even those passing through. These individuals are more inclined to use products and services that they know before considering an unknown. The very name of the business itself is one of the strongest pieces of marketing for the individual business.

Royalties

The most common thing that causes franchise owners to grow disenfranchised with their franchisors is the expense of ongoing royalties. Paying 10% of revenue back to the company may not seem like a burden at first, but over time there is a tendency to see it as a waste. After all, why pay money to a company for a business that you could just as well run without them?

This is an erroneous view held by many franchise owners who forget that one of their biggest customer draws lies in the brand name. Without that name they would have to labor much harder to establish a reputation in the community. Even if they were successful in that, they wouldn’t be able to fully compete with other brand name franchises.

Advertising

Advertising fees can be another source of contention, especially in smaller franchising organizations that don’t market extensively through traditional channels like television and radio. Franchises may wonder just where that money is going. Therefore as a franchisee it is important to not only understand your franchisor’s marketing strategies, prior to signing a contract, but also it is important to find out how much influence franchisees have in marketing.