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The Local Small Business Coach Podcast
Episode 41 of The Local Small Business Podcast. I am your coach… Tammy Adams. Here we discuss everyday challenges local small business owners face and help to provide the information you need to increase your profits, boost your sales, improve your processes and develop stronger teams.
Today we are going to discuss…..5 Pros & 5 Cons I Learned from Owning a Franchise
We discuss 10 things I learned from owning a franchise. A franchise isn’t for everyone and today I share the pros and cons I found during my 5 years as a franchisee
While my experience might not be typical of other franchisees, I thought I would share my big takeaways and if you are thinking of buying a franchise, it might give you a different perspective.
Back in 2008, I knew I wanted to start a small business in my local community. Not knowing what I wanted to do, I took the opportunity to purchase an existing business that happened to also be part of a large national franchise that has been around for many years, as you know, it was a Baskin Robbins.
During the 5 years I owned the business, I came to develop a love / hate relationship with owning a franchise. After all, there are pros and cons with being part of a “team” under someone else’s umbrella.
Let’s take a look at a few that stand out to me.
The Pros: Owning a franchise comes with several perks. There are definitely some pros to owning one. Some of these things, I think some franchisees actually take for granted due to not understanding the costs or challenges they would have if they had to do it on their own. Here are five things that I think make owning a franchise a great opportunity.
National Brand awareness / Fan Base
Probably the single best thing you get out of a National Brand is the momentum and rabid fans that come along with the name. In my situation I had grandparents bringing in their grandkids to relive the same memories they had 50 years earlier. I would hear stories of how their parents and their grandparents were lifelong visitors. They would have a passion for flavors that in some cases hadn’t been made in over 20 years. Having folks grow up and pass along a family tradition creates a rabid fan base that is yours to keep if you treat them right and ensure they get what they come for. You can leverage this in our advertising as well.
Proven Business Model
Most franchises are born out of a proven business model. They start out as a single location that grew into a healthy company and eventually spun into franchises. Folks buy into a franchise due to seeing the success of the business in the market place. Bottom line, the business works. You get to benefit from that original owner’s trials and tribulations. You don’t haven’t to learn the hard way, they have done a lot of the heavy lifting to work out the bugs.
Systems / Processes
For the vast majority of franchises, the corporate offices have fine-tuned the operating systems to create the processes and systems that work. They pride themselves on being “turnkey”, meaning ready to go out the box. They create systems that are easily duplicatable. This makes it easy for you, the franchisee, to roll out quickly within your store. McDonald’s is a great example of this. They are great at creating repetitive processes any teenager can learn. Also, before they roll out new programs they usually will test them in certain test markets or stores to ensure they dial in the process before releasing them to the stores. Many bring a new franchisee to a training facility prior to taking over their business to learn these systems in a “live” store I know I spent 4 weeks at what I call, Scooper School, so that I would learn all of Baskin’s systems and processes and why they worked.
Bulk pricing / Cost leveraging
Leveraging is crucial for getting the best pricing. Because a large franchise can pull together 100 – 2000 locations they can easily partner with suppliers to get the best bulk pricing. The more a distributor can make at one time, the lower the cost. While at times as a franchisee you feel the sting of prices going up on your costs of goods, one can only imagine how painful those increases would have been had you been a small fish in a big pond with no leverage. I think this is a big one that many franchisees miss. If you have never purchased goods without big volume discounts, you don’t realize you might be paying 50 – 60% more on your own.
Signing / Marketing
Signage can be very pricey. Not to mention the talents and skills needed to create advertising that is catchy and meaningful. I remember one of ours that still rings in my ears….” Ice cream and cakey cake…. ice cream and cakey cake.” Sorry, I digress. While some argue that you pay for these items with your advertising budget, this is very true. But as a small business owner, many would never be able to hire a high-end marketing company to develop this stuff and to test it. Not to mention the high-quality signs that you are usually given for your location. You may not like it all, but it is usually quality.
As with any business, there are cons to owning a franchise as well. For some folks, they might find my cons are actually pros for them. But for my personality type, these are what I didn’t particularly care for. So, keep in mind as I go through these that you might actually like these and put them in your pro column vs the con one. We each have our quirks and I believe if you have a previous business background like I did, you might also find these to be cons for you as well.
Not much “out of the box” thinking / Limited Creativity
Having spent the vast majority of my business career being encouraged to think outside of the box and find ways to create business and new ways to drive sales and profit, I found the heavy structure of a franchise to be frustrating. I understand it is crucial for a franchise to have the “sameness” location to location to create the national brand, but for me, I really struggled with the limited opportunity to try new things. I tend to be one of those “ask for forgiveness” type of person not a “get permission” type. While you do have some areas you can try new things, like local advertising, rearranging the store or bringing in good complimentary products are a big no no.
Are you truly your own boss?
This one ties into the first con I mentioned. With a franchise, you are being told what to buy, how to merchandise, what to price your products, and how you must do it. Sure you still get to pick your team and be involved as a leader in your community, but your ability to “just say no” isn’t always possible. I especially found this with equipment purchases. Some items I didn’t believe would have a return on investment (and they didn’t) and some I agreed with (like a new register system) but I would have planned out their purchase vs doing it when told, especially when it would cripple me or go against my debt free philosophy. The only debt I had in my business, came from these last minute equipment purchases that I had to do. I was left with no choice but to purchase and not enough time to plan ahead. One piece was $7,000 and I doubt 7 years later if anyone has had a return on that investment yet.
Advertising on a larger scale vs local
Earlier I mentioned one of the pros was the advertising that comes with a national brand. While this is a pro, there is a con side. The majority of this advertising goes into larger markets and not so much to your local community. For example, I was on the outskirts of a large metropolitan city. Very little of this advertising made my community. So while I paid the same percentage into the advertising pool, I got the least impact from it. So I ended up having to spend above and beyond my advertising budget to ensure I had a strong local presence. This can add up quickly and impact the bottom line since you are paying twice as much. Plus, it is a double edge sword. I needed that national advertising to get the Pro of a Nationally recognized product but it killed me as a small business to have to increase my advertising budget to offset this.
Limited Pricing Adjustments
The Franchise will have a suggested price structure. While there is some limited wiggle room to raise or lower your pricing due to your location, there are many times you are stuck doing national campaigns that just do not make sense. Depending on your situation, you might even say they are just plain stupid. While I grasp the concept of “lost leaders” and just getting folks in the door, there are times that no one has done the math.
I remember one in particular that drove me up a wall. We had a special that many companies will try and run. You know the type, buy one get one free or buy 2 get one free. Or maybe you get a discount with the more you purchase. We had one that ended up giving away 50% more product for a 16 cent profit! Who in their right mind would give their customers 50% more product for 16 cents? Think about it, you are decreasing your customers frequency by giving them more products, so they come in less often and you did it for 16 cents.
To make matters worse, this was a 12-month giveaway. In no universe is it smart to cut your customer return rate for a whopping 16 cents. My goal is to get them to come in more often not half as often. You might recall back in previous episodes we talked about one of the key factors to raise your sales is to increase customer frequency, this one went against this principle and caused me lots of frustration.
Cost to Your Bottom line – Royalty Costs / Payments
This one isn’t just about giving up part of your profits. In some cases, it is about what you are buying for those royalty premiums. I don’t mind paying for business and profits but it has to do one or the other.
Each business is different. But for many franchises, you will pay something like $25,000 for a 10-year contract. Then you will give up 5 – 10% of your profits monthly for the right to use their brand. Let’s say you do a million dollars a year, then you are giving away as much as $100,000 off the top to the franchise. So before your expenses and operating costs, you are already at 90 cents on the dollar.
If this brand is so popular that you would never be able to start a similar business making the same sales and profit then this cost might be a great investment but if it doesn’t, you might want step back and run the possible numbers. Please keep in mind, this cost covers quite a bit – brand recognition, reduced costs of goods, advertising, etc (like we have been discussing). But for some types of businesses, unless they are major players in your market, you could probably create the same sales doing it on your own.
I’m not saying this cost is always bad, just do your homework on the bang for your buck and what you get for the money.
While I don’t regret the learning experience, I would probably pass on owning another franchise unless the upside was worth it. I am the type of person that loves control. While the perks of the franchise are great for many folks, for me personally the business person inside of me wants to create and take chances.
A franchise is great for those who like to run their own business but have someone else put the processes in place and drive the business for them. This didn’t work for me since I wanted this control. But you might not like this part of the business so having that turnkey readiness might be perfect for you. I saw some franchises that thrived in this environment. We each have different strengths and weaknesses so you never know what parts of a franchise will feel right for you.
You must look inward and ask yourself which camp do you belong to? Do you want the autonomy to tweak and take chances? Or do you want to follow the status quo and trust your brand’s proven method?
Both are right depending on your goals and objectives. The key is to know your true self and what makes you happy and excited. There is no right answers that fit all. Be true to who you really are and what your style is.
I know some of you have a franchise and for some you, you have had yours for much longer than I did. You might have even had a different experience. If so, we would love to hear from you. Either shoot me an email or leave a message on the website. You can also leave a comment on the shownotes at localsmallbusinesscoach.com/episode41
And as we wrap up this episode I want you to know, that I realize being a local small business owner can be a lonely gig at times. But you don’t have to do it alone. Just know, I’m always here for you.
By the way, If you like what we are taking about, then make sure to subscribe to the podcast so you don’t miss an episode, if you love the podcast and what we are talking about, then please leave a 5 star review so other local small business owners know this is a podcast that they can’t miss.
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Meanwhile, I wish you the best in your business and remember: Great Customer Service, coupled with Great business practices will set you on the path to Great Profits!
Bye for now…..
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