The Pitfalls of Franchising

Fast food restaurants are often franchises.Lew Robertson/Creatas/Getty Images

Franchising opportunities have strong pros and cons. Franchising is a legal agreement in which you can purchase a business that sells established products and services. The benefits of owning a franchise include the opportunity to own a business, well-known products and services, use of the brand name, marketing assistance and having an established reputation. However, there are pitfalls of franchising, including expenses, inflexibility and lack of control and an assumption that the business will be a success.

High Expenses

Owning a franchise is expensive, which is a common pitfall. According to the Federal Trade Commission's Bureau of Consumer Protection, initial franchise fees, which are nonrefundable, range from several thousand to several hundred thousands of dollars. Other incurred costs paid to the franchiser include ongoing royalty payments, which are made even if your business is not successful; operating fees; opening fees and advertising fees. These expenses are on top of common startup business expenses, such as rent, equipment, marketing, inventory and business setup.

A franchise may come with a well-known brand, including product logo and advertising campaign, but they come with inflexible controls by the franchiser. The franchisee will sign an agreement that dictates details, such as pricing, employee pay rate, supplies you can use and what kind of advertising you can do. The franchiser also may control the location of your business, the setup and design of your site, the products and services you can offer, hours of operation and dress code. Any violation of these controls may allow the franchiser to revoke your franchise without reimbursing your expenses, according to CNN Money.

Buying a franchise is not a guarantee of success. Many franchisees fall into this pitfall of franchising. One primary reason for failure is competition. Depending on location, your area may be saturated with similar franchises, providing intense competition. Some franchisers offer protected territories where they have exclusive rights to the area for that type of business, but many do not. Another reason for an unsuccessful franchise is to deviate from the formula. Any changes to an established system may lead down a path of failure.