If you want to start a business, one of the considerations and questions you need to ask yourself is whether you want to start an independent business or a franchise; franchising has many advantages and disadvantages for franchisees and franchisors.
When considering whether to join a franchise, you need to consider all the benefits of franchising and the potential risks you might face. In this guide, we’ll outline those pros and cons so you can decide if franchising is the right move for you.
Advantages of franchising:
A franchisee is a third-party buyer who purchases the rights to a brand from a franchisor (brand owner). In addition to ongoing franchise fees for marketing, royalties and more, the franchisee pays the franchisor an initial franchise fee for the rights to use its brand.
Business assistance:
One of the benefits of franchising for the franchisee is the business assistance they receive from the franchisor.
Depending on the franchise agreement’s terms and the business’s structure, the franchisee may essentially receive a turnkey business operation. They can be provided with signs, equipment, supplies and an advertising plan – everything they need to run the business.
Brand recognition:
A big advantage that franchisees get when opening a franchise is brand recognition. If you were to start a business from scratch, you would have to build your brand and customer base from the ground up, which would take time.
On the other hand, franchises are already well-known businesses with an established customer base. So when you open a franchise with this recognizable branding, people will automatically know what your business is, what you provide and what they can expect.
Lower failure rate:
In general, franchises have a lower failure rate than independent businesses. When a franchisee buys a franchise, they join a successful brand and a network that offers support and advice, making them less likely to go out of business.
Also, franchises have already proven their business concept, so you are sure the products or services you will offer are in demand.
Buying power:
Another advantage of franchising is the sheer size of the network. If you are a solo business and need to order products or consumables to make your products, you pay more money per item because your order is relatively small.
However, the franchise network has the option to purchase goods at a deep discount by bulk buying. The parent company can use the size of the network to negotiate deals that benefit every franchisee. A lower price of goods reduces the overall operating costs of the franchise.
Profit:
In general, franchises are more profitable than sole proprietorships. Most franchises have recognizable brands that bring in customers in droves. This popularity results in higher profits.
Even franchises that require high initial investment for a franchise fee see a high return on investment.
Disadvantages of franchising:
Restricting regulations:
Although franchising allows the franchisee to be his boss, he is not in full control of his business or can make decisions without considering the franchisor’s opinion.
The most frustrating drawback for most franchisees has to adhere to the restrictions set forth in the franchise agreement. The franchisor may exercise a degree of control over most of the franchise business and decisions made by the franchisee.
Initial cost:
While the initial franchise fee investment has many benefits for the franchisee, it can also be costly – especially if you are joining a well-known and profitable franchise. While this often translates into bigger profits, coming up with that seed money can overwhelm any small business owner.
Even if you opt for a low-cost franchise, you’ll probably have to pay several thousand dollars. While this can be considered a disadvantage of franchising, it is important to weigh the opportunity against the initial investment and find the right balance for your business. And keep in mind that franchise financing options can help you come up with those startup costs.
Ongoing Investment:
In addition to the initial investment you will need to provide to start your franchise. Other ongoing costs are unique to franchises. As part of the agreement, the ongoing costs of the franchise should be enumerated. These costs may include license fees, advertising costs, and fees for training services.
You’ll want to keep these ongoing fees in mind when deciding whether to start a franchise.
Conclusion:
Like most other business decisions, there are pros and cons to starting or buying a franchise. And not all franchises or franchise relationships are created equal. Before choosing that which is right for you, it is important to research and understand all the pros and cons of franchising that you may encounter as a franchisee or franchisor.
