Maybe you have a strong entrepreneurial spirit and a good idea of the type of business your community needs. You’re ready to invest time, effort, and money to get it off the ground. However, there might still be some gaps in your knowledge or resources that could stop you from opening the business exactly how you envision it.

On the other hand, there are successful businesses that want to expand into your area but need someone with the time, capital, business knowledge, and willingness to take risks—perhaps someone like you—to take ownership of their brand locally.

If this sounds appealing—starting a business by working with an already established brand—then franchising might be a good option for you.

What is a Franchise?

A franchise is a business agreement where a company (the franchisor) gives another person or business (the franchisee) the right to use its brand and business systems in exchange for ongoing fees or royalties.

Think of it as running your own business, but as part of a larger, existing company. The franchisor provides the rules, business structure, and royalty payments or fees, while you run and manage the day-to-day operations (though in some cases, the franchisor may hold a small ownership stake in your business).

Why Would a Business Want to Franchise?

For businesses looking to grow, franchising offers a cost-effective way to expand while reducing risks. It also relieves the company from the challenges of managing employees. By franchising, the company can use the local knowledge and skills of the franchise owner. Unlike a hired branch manager, a franchisee has a personal stake in the business since they’re investing their own money.

Franchising allows a business to grow quickly and efficiently with less risk. The franchisee benefits from an established business model and a well-known brand, helping them hit the ground running.

Franchising as an Investment

Owning a franchise is definitely an investment. You’re committing time, money, and other resources with the hope of making a profit. It’s much more hands-on than investing in stocks or bonds, and it’s not for everyone.

Why do people choose this path? Research by the Small Business Administration and the Federal Reserve suggests that business owners often have higher net worths than those who work for others. Some people keep their regular jobs while running a franchise on the side (although that can be challenging). Others decide to put everything they have into their franchise business.

Advantages of Buying a Franchise

The biggest advantage of owning a franchise is that you can start a business without dealing with the difficulties of the start-up phase. Here’s what that might look like:

A proven business system: When you buy a franchise, you’re purchasing a business plan that has already been tested and works. You just need to adapt it to your local market.

Instant brand recognition: If the franchise is popular, your business can benefit from name recognition right away. This can save you the time and money you’d otherwise spend on introducing your brand to the public.

Marketing and advertising support: Some well-known franchises, like McDonald’s, run massive national advertising campaigns, which can be expensive if done independently. If your franchisor covers most of these costs and provides help with local marketing, that’s a significant advantage.

Economies of scale: As part of a franchise network, you may be able to benefit from the group’s collective purchasing power, allowing you to buy supplies at lower prices. This can be a huge draw for franchise owners who would otherwise need to invest a lot of time and money to achieve similar savings on their own.

Overall, buying a franchise can give you access to resources and strategies while lowering the risks of starting from scratch. However, there are still some risks involved.

What Are the Risks of Owning a Franchise?

High start-up and ongoing costs: Some franchises come with large initial costs, and you’ll also need to pay ongoing fees or royalties. These expenses can add up quickly and drain your cash flow. While you can take out a loan, there’s no guarantee your franchise will succeed.

Franchisor’s rules may be restrictive: If you enjoy being creative and coming up with new ideas, the franchisor’s rules could feel limiting. You may not be able to change the product, alter uniforms, or redesign the store without violating your franchise agreement. Remember, while you run the business, it’s their brand.

Reputational risk: If the company you franchise with faces a public scandal, it can affect your business. Even if your local franchise is successful and well-liked, the brand’s reputation can impact your profits. Being part of a recognized brand comes with the downside of sharing its risks as well.

These are just some of the pros and cons of becoming a franchisee. It’s important to weigh each carefully before deciding if franchising is right for you.

The Bottom Line

Does becoming a franchisee sound appealing to you? Do you have the money, dedication, and ability to follow someone else’s rules in exchange for using their brand and systems? Or would you rather develop your own business model, logo, and marketing plan, hoping to create your own brand someday (and possibly becoming a franchisor yourself)?

If you’re leaning toward franchising, be sure to choose a franchise that matches your interests, personality, financial situation, and location.