Franchise Risks: Are they safe investments?

Franchising costs and poor information can cause high failure rates.

According to a recent Wall Street Journal article, entrepreneurs investing in a franchise may not be making the safe investment they think they are making!

Franchise default rates run as high as over 41%!

Click here for Wall Street Journal article on franchise defaults →

Factors would-be franchisees should carefully investigate include:

1) Total costs, including upfront franchise fees and normal startup costs for that specific business (e.g., equipment, real estate, etc.). Ongoing franchise expenses need understood.
Franchise royalties are an expense. And, some franchises require that supplies are purchased from them, providing yet one more income stream to the franchisor.
2) The financial disclosures? Is there a publicly traded entity whose revenue and profit numbers can be used as benchmark metrics?
3) How are franchising expenses treated for tax purposes? Are franchise fees tax deductible?
4) Exit options if the entrepreneur needs to get out of the business.
5) Remedy options if the business is not meeting hopes and expectations. The business isn’t succeeding, now what?

Let’s just look at the expenses associated with buying a franchise.

People may consider buying a franchise because they think franchising offers the following:
• There’s a set business plan and template, so everything is already figured out.
• The business concept, offering and model are proven. Even though people want to be entrepreneurs, reducing risk is always a goal.
• Entrepreneurs want to benefit from a known brand.
• Entrepreneurs want a turnkey business, including training.

The problem is that the safety many people think franchising provides comes at a high cost. And, ironically, the high expense burden franchises impose may actually doom an entrepreneur’s chances of success. No matter what the business is, if costs are too high and cash flow is too squeezed, failure is certain.

While costs range into the millions, “the majority of franchises run from about $50,000 or $75,000 to about $200,000 to get started.” Read’s article on costs here. →

In addition to the startup costs any business would incur for its specific business, entrepreneurs must pay a franchise fee. Then operating expenses are increased by ongoing royalties paid to the franchisor. Operating expenses may also be inflexible and higher than market rate because franchisees often must purchase supplies from the franchisor.

None of this is intended to bash franchising, as many have realized true success as franchisees. However, the truth is that there can be a lot of hype in the selling of the dream of owning your own business. And, sometimes, all the franchisee has done is bought him or herself a job- with lots of hours, responsibilities and liabilities… and not that much pay.

Outpost Retail Systems sells Movie & Game Rental Kiosks as full business systems. There are no fees like franchise fees, no royalties, and the equipment purchases are tax deductible (talk with your accountant). Full training is provided. Owners may brand the kiosks any way they’d like and can succeed working as little as 1 hour per week. Worst case scenario- If a location the Owner-Operator selects doesn’t hit revenue goals, the kiosk is easily moved to a new location. We believe that we provide the safety people associate with franchising, just without the expense and risk.

About the Author

Outpost RetailPete Popcke started Outpost Retail Systems to help businesses and entrepreneurs achieve success and the rewards remotely managed, automated retail businesses can provide.View all posts by Outpost Retail →