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Franchises, Worth It or Not?
Looking to start your own business? Wouldn’t it be great to jump into a business that already has a system and marketing in place? You have probably heard of the franchising model, but does it make sense in the tech market? Let’s take a look.
There are many advantages to franchises and one of those is branding. What’s in a name? In fact, there is a lot in a name and when you have a good brand with a large following; it can easily determine the success or failure. If you think about all the McDonalds’ restaurants all over the world, most of them are franchises. The same goes for Pizzas and other food-related brands. When you walk into one of these restaurants no matter where you live, you will expect the same level of service and similar menus and prices. This system works because humans generally tend to gravitate towards what they know and are familiar with. In the technology world, franchises are not that common but the principle behind the idea still works.
Another draw to purchasing a franchise is that you are purchasing a system that is already in place. When you start a business from scratch you create the systems from scratch as well. The business system is crucial and as common sense dictates, businesses without good systems usually fail quickly. They are also less valuable because when you look to sell a business you are basically selling the business system that was created. Hence, this is the main attraction of a franchise- the one-two combo of a system and branding already in place.
Buying a Franchise vs Buying a Private Business
Franchise Principle: You want to start a business but you don’t want to deal with all the marketing, research, and branding. You have the capital to invest and someone is willing to help you start and give you the needed coaching. You part with your cash and set up your business as quickly as possible because you are not trying to reinvent the wheel. You start to see income immediately because you integrated a system that already works.
Startup Buyout Principle: You have an idea for a service or a product but you don’t have the time to go through the process. You look around for a little company that is doing exactly what you want and you see the potential in the company and how it can be a source of substantial income. You pay a large sum of money to buy the company with its client base and you are up and running the next day. Think about Google buying Youtube.
The idea behind this is that Franchises and Buying Startups are different but the principle is the same. You get what you want by throwing money and it with the strategy of saving time and resources.
There are disadvantages to franchises and one of the foremost is the amount of money you have to spend to integrate the system. You will also be forced to follow the same pricing and marketing ideas of the parent company. If the parent company decides to upgrade, you will not have your say in how to proceed. You will also be obligated to use the same sets of providers even if there are better offers available. There is also the problem of location if you choose a brick-and-mortar franchise. If you have a good brand but choose your location unwisely, you will lose money and you will lack the flexibility of adapting your prices to accommodate your losses.
The Tech Market
When it comes to purchasing a franchise that offers computer services, repair, managed services, etc; my personal opinion is that it’s not really worth it. Why? At the bottom of this article, I listed links to some IT franchises. That is not an extensive list, but even so, I have only heard of one of them, at least in my area (Geeks on Call). I have only heard of them because I run a business and I’ve researched who the competitors are. However, if you ask my typical customer, or basically the average customer around here about that franchise I guarantee they would not have a clue. They are just another computer repair service.
The point I’m getting at is that one of the main draws, the branding, is kind of useless in the market where I am. The only advantage of buying a franchise in this area is getting a system already in place and a franchisee to do the marketing. However, the name (branding) just doesn’t make much difference because none of those franchises listed are that well known to the customer base. This may be different in your area, so please recognize I am giving an opinion. In your market a franchise may be more beneficial, but from what I see in computer repair franchises, the branding advantage just isn’t there. The question you need to ask is if the system, marketing, and branding are worth the cost of the franchise. Perhaps there may be a customer base in place, for example, a business may have a contract with a certain franchise in a different city and they just expanded to your area. Opening that franchise could easily get part of that business.
Bottom line, you need to do your own research and make a decision based on what is best for you and what you want to accomplish.
In the world of business, time is of the essence. If you are not quick at adopting a methodology that works, you will likely find that you are part of yesterday’s technology and will be relegated to the land of historical fascination. When it comes to franchises, there are those who feel that they are not worth it whilst others see the benefits. Like most things in business, it can go wrong and you can end up losing money. On the other hand, it can also help you become the next big thing. Remember Yahoo and Google? Remember MySpace and Facebook? These are not franchises but someone did something wrong and another got it right. Buying a franchise may get you in the door faster, but you are at the mercy of the parent company for future direction. Plus, is it worth the upfront cost for the system and marketing; are you better off creating those yourself; or if you have the cash, what about buying an existing business in your area that already has a customer base and built a good local brand?
So to answer the question if franchises are worth it or not… well, there really is no answer as it’s totally up to your goals and your own situation. Due diligence is required and a franchise is no guarantee of success.
Here is a list of some computer service franchises for further information:
We would love to hear your franchise stories; please leave some comments!
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A very good and informative article and also very timely as I had been looking to buy into a existing franchise in my area. Your article has opened my eyes to some options I wasn’t aware of.
Before opening my business in Boston, MA I did a research to find out what franchise options were available. It turns out Computer Troubleshooters was one franchise to go with. Start up cost was about $20k. In a nutshell I spoke with one of their franchise owners, looked at their overall business model and came to a conclusion that it is absolutely not worth it. The main reason was that no one around my area even heard of their name and initial investment was just out of my league.
Three years later I am doing very well on my own and thinking of expanding outside my state…
Before starting my business I looked into Computer Troubleshooters and Data Doctors (not mentioned here) and felt that the fees, both initial and ongoing, were beyond reach for me. I am glad I didn’t pursue that route as my business grew quickly.
I did purchase another local company about 1 year into my business and that was a WAY better way to go. They had established customers and a specific clientele that continues to call the old phone number today. If I had to make a recommendation….look for another local company that is wanting out of the business or has overgrown without the capacity to handle the business. These type of connections can quickly lead to plenty of work.
Well, I have some expertise in this area, since I used to sell franchises. (Hotel franchises, not tech franchises.) And Chuck gets it exactly right. The true value in a franchise, of any type, is the instant amount of business that you will receive for owning that franchise. If you have a McDonald’s franchise, you know that the day you open you will be busy. Can’t say that about any of the franchises listed here or any tech franchises that I know of. Pretty much the only tech shop with any sort of nationally recognized brand is the Geek Squad and maybe Easy Tech. That’s it.
Good article, good conclusions. You would be better off buying an existing shop in your area, if possible.
Great article but disagree on a few things. The “You will also be forced to follow the same pricing and marketing ideas of the parent company” I do not believe that is correct. The parent company might suggest you charge say $99 per hour or per job but they typically do not require you to do that it’s more of a suggestion. Same goes for providers you are generally given providers to use that have formed a relationship with the main franchise but it is not required to use them either.
If you do your due diligence like you suggest you will find you are not at the “mercy” of any parent company. What you are at is the recommendations that most franchises offer to franchisee’s in order to make them profitable and successful. I would call them “guidelines” that they feel are important buy typically if you decide not to implement them then that is your decision.
Branding is important and as with any franchise it sometimes takes years to establish that brand. McDonalds did not become a household name when they opened their second franchise nor did Dominos. But, beside the branding you do have to consider what else a franchise offers up. First an establised business practice system, marketing materials, vendors and a variety of other things.
Years ago yes franchise prices were extreme but in todays economy you can easily get into a franchise at a very inexpensive cost. So it’s a matter of determining what route to go and the potential savings of going the franchise route vice creating everything from scratch.
Pros and cons to everything and like you suggest you need to do your due dilligence before making a decision.
Disclaimer…I am part of a franchise. I am not pro or con on a franchise route I just feel that everyone needs to make a decision based on themselves.
Pizza hut, KFC, MacDonalds franchises are not available to most of us. They are closed systems meaning new stores are opened by existing franchisees only. The stores that might be available to outsiders are ones that those insiders do not wish to open.
By the time a franchise gets that popular it will be closed to you. So it is a bit silly to say that the only value of a franchise is its widely recognized perception or top of the mind awareness. The way a franchise gets big is to ensure that you are able to handle the customers who come to you in a way that adds value to the over all Brand.
No matter what name, brand or franchise you use, you are going to develop a clientele that know you, if you do it right. Most retail businesses spend about 5-8% of their gross on advertising. That is not a large amount of money so you better know how to spend it to maximize getting attention with customers. A successful franchise has figured this out and tells you where to spend your few dollars for the most bang and where to not spend them. Ultimately success is yours or not depending on your judgement.
The reason to consider franchises are that the successful ones have discovered and developed systems that work well together to allow the owner to have the time to be successful.
Owners often begin one man shops. They are the CEO, accountant, customer service, tech, tax preparer, inventory person, order-er and receiver…. For each hour spent with a customer making money there are any number of hours doing support work such as accounting and bookkeeping and ordering and receiving to be ready to perform your duties. Thinks of the Army. Less than 40% of the army are combatants the rest are logistics (supply, cooks, corp of engineers and such). We all believe we are great multitaskng but studies tell us that none of us really are. Thus the accident increase with cell phones texting while driving is the most poignant example.
Every business has “critical success factors.” Some businessmen are lucky enough to figure out what those are before going bankrupt. Some of the successful businesses might then offer their systems to others for a royalty. In my view it is well worth it to have someone lay out the systems in a way that manage all the critical success factors. Know you have a plan to follow and if you did your home work and found the right franchises and you follow their plan your chances are very good of still being in business 3, 5, 15 years later.
I have run many different businesses in my 55 years. I have hardly ever been an employee in my life except for working as a small business incubator to help new young companies start up (sponsored by my Town, County and Chamber of Commerce). I am very good at quickly figuring out critical success factors of new businesses. Even still, I always consider a franchise first when I contemplate beginning a new business venture.
Think of beginning a business as being like Salmon swimming up stream to spawn. Some make it and are successful but most die of exhaustion. This is exactly like starting a new business.
The biggest shortage in a newly started small business is Time not money. Although when you do it poorly, money will be pretty darn short also in very short time and you will be looking for a job again. A good franchise helps you to do several important things: Usually they require proper planning during their training weeks; they require a proper budget and funding; they show a business plan and marketing plan, and ensure that all things are on track and you hit the ground running when you open.
None of us do everything correct. In my case I tend to procrastinate on some things. I still do not have after 18 years in the business, a SEO-ed Website. This probably couldn’t happen with a franchise as they do much of that stuff for you so you simply supply your name, phone and address and its taken care of for you.
SBA does studies on everything related to businesses and found that only about 20% will continue to be in business 1 or 2 years after they begin, and 8% will still be open after 5 years. They also found that when owners use a successful franchise they are twice as likely to make the first cut and still be in business after the 1, 3, 5th years of operation.
So this bravado of I can do it on my own, I can do it with the $400 in my savings and no income or no plan is likely to take you out.
SBA used to state that under capitalization is the #1 reason businesses fail. However they now believe that “management is the #1 reason.” No amount of capitalization is enough to some people to get over the learning curve.
Where to begin. In my town, Portland OR, a search for Computer Repair Portland OR brings up 1.6 million hits and only one franchise is on page 1.
I spent six months and a bunch of bucks researching computer franchises. My bottom line is none of them guaranteed enough territory to make $1M a year. Upon hard questioning of the owner of one of the franchises he finally admitted his franchises were designed for a three person shop with the owner making $50-100K and two $25-40K employees. When I went to visit the “most successful” I did not see signs of success (take these for what they are worth to you) nice vehicle, branding (car sign, hat logo, company shirt, sign for brick and mortar location), adequate spare parts organized for easy access and inventory.
Now you can call me judgmental if you want, one of the “most successful” was living in a trailer park (perhaps banking all his money). Most did not have a “work vehicle” that screamed HERE I AM THE COMPUTER REPAIR GUY. Store fronts did not follow the basic axiom of real estate, location, location, location!
One had a clever gimmick, a near classic car with his signage on it so you could not miss him. He told me that he received most of his business from phone number on the car. The signage basically says “Computer Repair” and a phone number. Over a beer he told me the franchise had been a waste of money.
Remember a franchisee is in business to make as much money as they can while keeping you marginally happy. If they can do that with $25K/yr they will. They are not going to give you a territory for $1M/yr without a lot of bucks up front. With that kind of money you can open your own well planned business that will have that $1M/yr potential.
Just because they might belong to a franchise that does not mean they would be on page one. As far as “none of them guaranteed enough territory to make 1M a year”…How much territory is that? Is it a population of 50K or 250K? If they gave you that much territory could you guarantee to them that you will make 1M a year?
For that franchise guy saying it’s been a waste of money on top of everything else you said about the guys shop, appearance etc i’d be willing to bet that no matter if he was part of a franchise or not that he would still not be successful. I can not think of one franchise that “picks” your storefront for you. So if that guy picked the location himself then how
would that be the franchises fault? If things in his shop are not organized again who’s fault is that the franchises?
I lost a lot, lot, lot of money in a franchise. I cannot say which one (it *is* in the list though) because I had to sign an agreement not to in order to get out.
I cannot speak for all franchises but my observation was that the only people making any money were working for the franchisee.
On the bright side, my complete business collapse led me to the Lord Jesus Christ. Hard to be humbled when doing well in life.
For this reason, losing my shirt in a franchise was a true blessing.
I measure “success” in a completely different way now.
Hope this helps someone else.
EDIT. The following:
“I cannot speak for all franchises but my observation was that the only people making any money were working for the FRANCHISEE.”
….should have read:
“I cannot speak for all franchises but my observation was that the only people making any money were working for the FRANCHISOR.”
Interestingly (or not), the people “working for the FRANCHISEE” did make money; i.e., the employees who were paid a salary by the owner. The owner typically works long and hard while losing money to horrendous fixed costs (in my case at least).
To the comment above that franchises have a better chance for success than a typical business start-up, I say this: franchisees are a select pool of business owners. Typically they must have the cash-in-hand and a certain level of net worth or a franchisor will not take them into the franchise. By definition a new franchisee will have a much better capital position than your average business start-up. Beware the downside of this: the franchisee will also have MUCH more capital to lose than Johnny and his $400. Yes, you might make it 2 years in the franchise (where Johnny dies off), but Johnny lost $400 and you lost $40,000+++. The franchisor is counting on the franchisee’s deeper pockets to keep them going as long as possible before the crash sets in.
The advice above about buying a book of business can be good. Alternatively, develop your own business based upon SERVICE CONTRACTS and then sell that business to another techie.
Nathan above obviously dodged a bullet…bravo.
To this:
“Upon hard questioning of the owner of one of the franchises he finally admitted his franchises were designed for a three person shop with the owner making $50-100K and two $25-40K employees.”
I say: LIES (not Nathan but the guy he was interviewing). There is not a computer franchise out there that can produce these numbers, especially not with the fixed costs of vehicles and a brick-and-mortar store. LIES. (Hey, I lived it. I know of what I speak).
More like: owner making ZERO and “two $24-40k employees.” In other words, $24-40k in OVERHEAD that will kill you.
Listen to Nathan. Carry on….
re 25-40k a year, that’s entirely possible, especially in counties with small towns where there is no competition. People will drive half an hour or 45 minutes just to have you work on their computer. You could charge $75 an hour or more because there is no competition. It’s entirely possible for a 3 person shop to make those figures; just because your franchise didn’t doesn’t mean it’s not possible.
Thank you for showing that you don’t need a franchise.
I can speak from experience about a case where branding has stuck with the franchise even though it was bought out by another business and the name of the business changed completely. People still think we’re with “So and So’s Computers” and frequently call either us or the old franchise number looking for the other business because all they remember is the brand name of the old trusted company. Buying a current PC Repair business/ISP that already has a loyal and trusting client base can be a real advantage when there is no real competition. It completely depends on whether the prospective community you are looking at has any memory for the brand name you’re looking at, ask them where they would go for PC repair, if it comes off the tip of their tongue, it’s a franchise it might be worth buying rather than starting off on your own with your own business or trying to edge another franchise into the community that would be open competition.
The salient point is that the franchise is gone and the independent business is alive.
The dirty little secret of franchisees (and what franchisors count on): it is difficult for a franchisee to admit problems with a franchise or franchisor WHEN HIS/HER LIFE SAVINGS ARE IN IT.
It is like an MLM or other pyramid scheme: hope springs eternal that it will eventually “go” (or someone will be found to buy your
(oooh, for an “edit” button!)
——
t is like an MLM or other pyramid scheme: hope springs eternal that it will eventually “go” (or someone will be found to buy your financial albatross).