Small Biz Franchise Blog

Why do people invest in franchises?

Posted on July 24, 2009 by Lizette Pirtle

There are several reasons why people invest in franchising.  People want to minimize risk; they want someone else to worry about the future; they want to take advantage of combined purchasing power; and, most importantly, they don’t want to make mistakes.

•  They seek independence BUT with minimal risk.

An entrepreneur is prepared to put everything they own at risk just so they can own a successful business. The risk of failure is an accepted part of an entrepreneur’s life. It is quite common for entrepreneurs to become viral entrepreneurs and start at more than three different businesses in their career. 

True franchisees are not true entrepreneurs. Most franchisees want the freedom to make decisions and be their own boss, but they fear total financial risk. Franchising is a natural alternative to the high risk of being a true entrepreneur. Franchisees get the opportunity to have more independence than if they were employed yet they benefit from the experience, the support and the training of the franchisor.

•  They want continuing R&D support.

There is a common understanding in the world of franchising that the responsibility of franchisees is to properly handle customers today while the responsibility of the franchise company is to ensure there will be a tomorrow. Small business owners such as franchisees do not have time to focus on innovation or to keep abreast of changing buying habits of their customers. Franchisees expect and are dependent upon the franchise company protecting their future success.

•  They seek the benefits of combined purchasing power.

Logic suggests that group purchasing will result in lower costs for everyone. Prospective franchisees hope to benefit from the franchise company’s efforts to reduce their operating expenses through their buying power. They realize that they do not have the same connections or ability to negotiate favorable pricing as compared to larger companies. 

•  They don’t want to make mistakes.

Prospective franchisees are afraid of making mistakes. They place great value on the knowledge and expertise of the franchisor. They feel this experience will protect them from making mistakes.

In addition, people looking to invest in a business see franchising favorably because it’s a widely accepted choice. Franchise companies are regulated by the Federal Trade Commission (FTC) that requires them to have a Franchise Disclosure Document (FDD) that creates transparency of the franchise opportunity being offered.  

 Prospective franchisees are not “true” entrepreneurs and in most cases the money they are investing is everything they have and what they can borrow. In their minds, there is very little or no room for making bad choices. Franchising reduces the chances of making the wrong decision. 

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