Thinking of investing in a food franchise? Read this first
A food franchise is a type of business in which growth is achieved by the owner of a business granting permission to individuals to open additional branches of said business. The owner of the franchise is known as the franchisor, and they issue a license to franchisees who are then allowed to sell the franchisor’s products and services.
The franchisor gets someone to expand their business without having to pay for it or oversee it themselves, while the franchisee gets to sell and market the products of an established, successful brand, as well as the systems and support of the franchisor. In many instances, this is a highly mutually beneficial arrangement.
As an aspiring food business owner you may consider investing in a food franchise. This article will take you through the basics of investing in a food franchise as well as the pros and cons should you decide to go ahead.
Who does it suit?
Franchising suits someone who has the desire to run their own business but doesn’t have their own ideas for products and branding. Within a food franchise, the product development and subsequent marketing strategy have been done for you. And then it’s been tested and refined and developed some more – all that’s left for you to do is to implement it. Conversely, if you have your own food products and are adamant about making your own distinctive mark on the world, then franchising is going to be restrictive.
Due to the systems and support you receive as part of acquiring a franchise license, it also suits those that are self-motivated and have self-starting tendencies, but not someone who is fiercely independent. Franchises are built on well-designed systems that are easy to replicate, so there’s some scope to do things your way – but not much.
Lastly, due to the licensing fee, a food franchise is for those with start-up capital, or that are creditworthy enough to qualify for a loan. Bootstrapping and slowly building up capital through steady organic growth aren’t options on the franchising route.
The Pros and Cons of Food Franchises
Pros of investing in a food franchise
- Established Brand and Customer Base – The biggest advantage of becoming a franchisee is buying into an established brand and all the customers that come with it. You don’t have to build a brand from scratch; it’s already been done for you!
- Access to Systems – you won’t have to experiment with the most efficient way of doing things, it’s already been worked out for you. What you’re purchasing are years of trial and error, with you being granted to a system that works.
- Marketing Materials and Support – As well as systems, you’ll have access to the fruits of the labour of a marketing department far bigger and more accomplished than you could hope to have in your own startup. You’ll benefit from an existing customer base and all the new customers the business is able to attract in future efforts.
- Reputable Suppliers – They’ll be no need to find your own suppliers as they will have already been found for you.
- Ongoing Research and Development and New Products – When the business develops new products, you’ll get them too.
- Business Support and Development – you’ll have access to a support network for whom it’s in their best interest to help you succeed and develop. In many cases, this comes in the form for excellent training programs designed to help you realise your potential.
- Reduced Risk – Purchasing a franchise carries less risk than starting a business from nothing.
- Financial Assistance – Some franchisors provide loans and other assistance to help franchisees.
Cons of investing in a food franchise
- Initial Start-up Costs – Between the franchise licensing fees and other start-up costs, starting your own franchise is far from cheap.
- Royalty Payments and Ongoing Fees – As well as the start-up costs, you’ll have to pay a percentage of your monthly profits to the franchisor. What’s more, some franchises will have you pay a monthly fee for marketing support and materials.
- Limited Creativity and Flexibility. Joining a franchise has its advantages, but creativity is not among them. You must use their system and follow their rules.
- Unable to Choose Your Own Suppliers – On one hand, you don’t have to find your own suppliers, but on the other hand, you don’t get to choose your own suppliers. Some franchisors stipulate you have to use their suppliers, and this can be at a higher cost than average.
- Locked into Long-Term Contract – If you make the wrong choice and find it’s not as expected, you can be locked into a contract for many years.
- Dependent on Franchisor Success – Sure, you get to benefit from the success of an established brand, but you also have to share in their failures too. Any negative press, scandals, or blows to their reputation will have a direct impact on you, and you could have had no part to play in it at all!
- False Expectations – Many people think buying a franchise is a guaranteed money maker and you’ll be riding someone else’s coattails all the way to the bank. You’ll still need to be business savvy and put the hard graft in as with any other business.
Things to Be Wary Of
- Money Matters – First and foremost, you need to be wary of how much the food franchise is going to cost you; both initially and going forward. It’s crucial you have an intimate understanding of how the fees and royalties you’ll have to pay are structured and how much they’re going to set you back. With that in mind, you can determine how profitable the venture is poised to be and if it’s going ahead at all.
- Franchisor Control – As stated earlier in the article, franchising is for the relentlessly creative or those who crave unadulterated freedom: you’ll be required to fit into and work within a defined system. However, how much control the franchisor is able to exert over your business varies from franchise to franchise. Be aware of how much freedom you’ll actually be entitled to before making any decisions.
- Contract Length – Be aware of how long the contract for the franchise lasts for and if you’ll be willing to commit to a business for that long (particularly if it’s not going well)