Seven Reasons Why Buying a New Franchise Business Is a Disastrous Mistake

I have for a long time been fanatically supportive of purchasing franchises as a start-up business. For me, buying a franchise is the easiest and surest way of taking the big plunge into entrepreneurship. Sure, you leverage on someone else’s marketing and branding, but at least it saves you the trouble, the dollars, and puts your focus back on sales and operations. It makes the starting process a lot easier, safer, AND CHEAPER. Here is an article from Donald J. Trumps’ online University: Trump University, which begs to differ from my view point. I thought it should make for an interesting debate; I invite everyone’s thoughts on this.

Posted by Raghav Somani

Richard Parker: Jeff Elgin’s recent article in Entrepreneur, “Top 10 Reasons for Buying a Franchise,” takes my breath away. Sure, there is logic behind some of the reasons he spells out for buying a franchise – you’re also buying a recognized brand, he writes, plus receiving promises of training and advertising. But I have heard them all before and my experience tells me that buying a non-franchised business is a vastly wiser business decision every time. Further, reality dictates that not all franchisors come close to living up to the representations they make when “selling” you the concept.

In fact, I put together a list of my own – called “Seven Reasons Why Buying a New Franchise Is a Disastrous Mistake.” (Notice, I stipulated, a new franchise. In a moment, you will find out why.)
And here are my reasons:

1. The failure rate of franchises is greater than most people realize – far greater. If you ask the friendly franchise salespeople to document failure data, you will see their eyes glaze over.

2. Opening up a new franchise location is only slightly better than a start-up. You have absolutely no assurances that it will be successful. And when you are buying a franchise a lot of the decision about your location is not yours, but the franchise company’s.

3. Not everyone is suited to operate a franchise. Do you have entrepreneurial fire? Do you dislike being told what to do? Do you want freedom with your marketing plan? If so, owning a franchise is not for you.

4. It is difficult, if not impossible, to generate any significant money as a franchisee. Period. There are enormous growth opportunities with owning a non-franchised, independent company. For example, you can acquire additional businesses, open up new locations, initiate innovative marketing concepts, and add new products or services just to name a few. Unfortunately, with a franchise, you may be completely restricted from any of these opportunities and the business can remain completely stagnant.

5. The franchisor itself can be your biggest competitor. As soon as you start to make progress, they oftentimes will open another nearby location. They will portray it as a way to build the brand and ultimately benefit you, but let’s call it what it is – more competition and often a watering down of your business. Expansion is the number one agenda for most franchises.

6. You have to follow their rules, policies and procedures – even if things are not working. If your business is not doing well, it’s like being on a sinking ship with no lifeboat.

7. There can be very restrictive terms if and when you wish to sell the business. If you own and build an independent business, and grow it, you can sell it for vastly more than you paid for it. With a franchise? Forget it.

That’s all the “bad news.” The flip side is that a franchise can be a solid business model for some people’s initial foray into business ownership. This is especially true if you lack the necessary skills or confidence you need to be an employer and not an employee. In this case, there’s a great solution: buy an existing franchise, a resale – one that is already up and running successfully. Even though the disadvantages I note above will still apply, at least you will be able to investigate its sales and other figures so you have some idea of whether the franchise you are contemplating is a money-maker or a dud.

At Trump University we are very bullish about the approach of buying a business as a shortcut to building wealth quickly and reducing risks. While a franchise can indeed reduce risks compared to “going it alone” right from the beginning, the same funds (or significantly less money) can often be used to buy an existing business complete with a proven track record, good branding and most important of all – paying customers.