September 28, 2023
In many cases, purchasing a franchise may be more expensive than opening an independent business.
When you buy a franchise, startup costs include paying an up-front fee for use of the franchisor’s brand and, perhaps, expenses for training which may or may not be very useful). In addition, you are often required to purchase supplies from required vendors (which may include the franchisor or its affiliates) that may charge more than you would otherwise pay on the open market. Franchisors can get rebates (or kickbacks) from vendors, so a franchisor may require you to purchase supplies from the supplier that is willing to pay it the most in rebates/kickbacks, regardless of quality of the supplies or services.
If you open an independent business, you can shop around until you find a vendor that fits within your budget and provides you with what you need. This is not always easy by any stretch of the imagination, but having an independent business does provide you with more flexibility in attempting to reduce costs.
Additional Franchise Startup Costs and Considerations
Franchisors may impose certain buildout requirements or renovation expenses that are not worth the expense in your particular situation. If you owned an independent business, you would be able to decide what is worth it and what is not worth it when it comes to buildout (e.g., a franchisor may require you to open in a space of 2,500 ft2 when a space of 1500 ft2 would be more than enough).
Franchisors may also require franchisees to participate in marketing campaigns that are either not effective in their local markets or simply result in lost profits for franchisees (i.e. repeated free product or services giveaways). While every business will incur costs for marketing and promotional efforts, franchisees often do not have the ability to control how to allocate such funds in order to ensure maximum impact for their spending. Franchisees may have control over certain local advertising expenses, but the franchisor will control the national brand fund and it has the ability to require franchisees to comply with various promotions even if the promotions are not financially workable for franchisees.
In short, it may be less expensive to open a franchise as opposed to opening your own independent business, but this is often not the case. One thing we advise all prospective franchisees to consider is whether or not the expenses associated with the franchise are worth the benefit, or if they would be better off opening their own business.
If You Open a Franchise, Have the Right Legal Team on Your Side
Only you can decide if you should open a franchise, but if you choose to do so, the attorneys of Garner, Ginsburg & Johnsen, P.A. are eager to help. We have extensive legal expertise in franchise law, supporting franchisees across industries. Contact us to learn more or to get a consultation before buying a franchise.