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February 18, 2009

Franchises Aren't the Best Business to Buy Right Now

This allbusiness article on franchises published last week ignores some of the worst drawbacks of franchises. The biggest problem with many, if not most, franchise operations is that franchisors charge too much for a business that doesn't have enough value to justify the high upfront and ongoing costs. In a recession, many franchises won't have enough income to cover the cost of capital and ongoing franchise fees. If yours is a typical franchise, you'll have agreed to pay the franchisor three to six percent of your monthly gross revenue (big-name fast food operators, such as Wendy's, McDonald's, Burger King, and Subway typically charge between eight percent and 11.5%), plus a few more cents on your sales dollar for the franchisor's marketing efforts. You may also have obligated yourself to buy goods and services either directly from the franchisor or from an approved supplier, meaning you'll almost surely be paying more than if you bought them on the open market.

Add it all up, and you're likely sending the franchisor eight to ten cents of every dollar you take in. This is obviously a huge added burden if your business has begun to lose money, because unlike an independent business, you need to make not only an operating profit, but also enough extra to pay the franchisor.

For more information on buying a franchise, see Nolo's article Want to Buy a Franchise? Ten Reasons Not to Do It.