Pros and Cons of Franchising
There are many reasons for someone to choose franchising as a business model. Each franchise model has it’s own unique benefits, culture, processes and systems which should be considered before buying a franchise.
Following are some of the general advantages and disadvantages of owning a franchise:
Branding – as a franchise, branding should be in place and recognizable. This is one of the greatest advantages of a owning a franchise. The branding brings in customers that may not patronize an independent business of the same type.
Marketing – Marketing and advertising are developed and tested. The franchise can pool their resources to develop quality campaigns and professional advertisements. Keeping up with marketing and advertising can be daunting for an independent business.
Proven Systems – Systems and procedures are in place, along with training manuals, and replicable processes. These systems have been tried and tested.
Faster start-up – The franchise has opened multiple units, therefore, they have a great deal of experience with start-up. They should have developed processes that will assist in getting the business off to a good start.
Financial assistance – franchises have a good track record of success. Therefore, banks are more likely loan to potential franchisees than independent business start-ups. In addition, there are several financial partners that work with the franchises to assist in financing.
Management – the management of a franchise system often has many years of experience running franchises. This experience is valuable to franchisees opening their business.
Technology – as technology advances the franchise system requires updates and will need to find ways to improve processes using technology. The cost to update can be shared with all of the franchisees making it more economical than for an independent business.
Defined territory – depending upon the franchise, there can be defined territories. Defined territories are an advantage because they keep other franchises of the same brand from infringing upon your customers.
You’re not alone – when you open a franchise, you have the development team of the franchise and other franchisees to turn to for support and advice. This team advantage is valuable as you have someone to turn to who has been there before and can share best practices.
Independence – a franchisee is required to follow the systems and procedures set forth by the franchise agreement. Trying to change things too much will be frowned upon by the franchisor and could result in a loss of the franchise license.
Royalties – royalties are fees paid by the franchisee for the use of the licensing, trademarks, and systems set forth in the franchisee agreement. These are typically paid based on gross sales, but sometimes are based on a flat fee or product purchases. Royalties go to the franchisor and allow them to continue their support and improving and promoting the brand.
Territory restrictions – as the owner of a franchise with defined territories, there may be times when the franchisee has requests to service customers outside of the territory boundaries.
Capital outlay – there is more capital needed in the beginning to open a franchise due to the franchise investment fee. This investment up front with the franchise gives you the rights to use their licenses, trademarks, branding, and systems in your business. The cost is often offset by the support, training, and faster start of the franchise model.
Agreement time frame – a franchise agreement is for a certain period of years – often 10 years. At the end of the 10 years, the franchisee typically has the option to renew their agreement. This can also be an advantage if the franchisee desires to leave the business at the end of the contract.
These pros and cons are far from inclusive of all franchises. Each individual franchise model will have it’s own variations since they are all different. For a serious franchise contender, the above could be a starting checklist of items to consider when looking at individual franchises. Ask lots of questions, learn about the culture of the organization, talk to several current and past franchisees. In addition, work with professionals such as accountants and a franchise attorney before making your final decision. Working with a franchise consultant to narrow your choices to a good fit will save time and aggravation in addition to providing you with valuable insight into your search.