Pros and Cons of Franchising a Business
Franchising is a kind of business relationship between two sides - a franchisor and a franchisee. The first party gives to the second party the right to work under its own brand. The franchisee receives the entitlement to use the franchisor’s business model and technologies, including the name, merchandise, equipment, and much more. The franchisor receives remuneration from this relationship through a lump-sum fee and royalties.
In the modern world, franchising is booming and is continuing to cover more areas of business. Many stores, coffee shops, bakeries, beauty salons, medical establishments, and other businesses you can franchise. Thus, many entrepreneurs decide to dive into the business world by acquiring a franchise. However, before selecting this path, it is important to think about both advantages and disadvantages of franchising for each party - a brand owner and a buyer.
Advantages of Franchising
There are pros and cons of both opening and owning a franchise. To avoid any problems or surprises, it is essential to assess all possibilities of employing this sort of business model correctly. Consider the main advantages of franchising for both parties to learn more about your prospects.
For a Franchisor
If a franchisor selects franchising, the main benefit he or she gets from it is expanding the trading network. A franchisor receives increased brand awareness and competitiveness of the brand in the market. The franchisor develops a brand with a minimum capital investment and still has its power over its franchisees.
Basically, the franchisee is to develop their own franchise. They are engaged in all business operations and are in charge of sales, staff performance, bookkeeping, and preserving the course of the brand. They invest their own money into the enterprise and regulate all processes. Franchisors don’t have to supervise every step of a franchisee; often they provide training and assistance. If a franchised unit is actively growing and making a profit, there is no need for a franchisor to interfere.
Efficiency and profit
Since the income of each franchise owner depends on their own abilities to conduct business, entrepreneurs try to use their skills and knowledge to the fullest in order to gain maximum revenue from their enterprise. This brings additional profit to the franchisor. It will be difficult for the brand owner to achieve the same results if he or she runs each business unit themselves.
Boost of brand recognition
Franchising gives the business owner an opportunity to increase the recognition of the brand throughout the country or even the world. The more franchised units the brand owner opens, the more awareness and profit he or she gets. Hence, by sharing rights, the founder can increase brand recognition in the market in a short time and not spend huge capital.
Regardless of the outcome of franchising, whether a franchise owner succeeds or fails, has low profit or few clients, the brand owner will gain experience in conducting business in a certain territory. This will help improve the business structure and learn from the errors in the further advancement of the brand.
For a Franchisee
Off-the-shelf business model
The key problem for novice entrepreneurs who desire to open a business is mistakes in drawing up a business outline for an enterprise development. Acquiring a franchise means getting a proven business model that has worked perfectly through the years. A franchise owner does not need to worry about different factors and risks, as franchisors already provide a working model and often offer support. Choosing a franchise over an independent business doesn’t mean that you won’t become your own boss, it means that you will not start from the ground up but from a pre-made business right away and in addition get necessary assistance.
Operation under a well-known brand
If you were to open a business from the ground up, you would have to worry about earning a reputation. Whereas a franchise provides an opportunity to run a ready-made business with an existing customer base. It also allows you to focus on the management of the future enterprise and make a profit right away.
Help from the franchisor
If both sides agreed to long-term cooperation, the franchisor will not let the franchise owner be left to chance. Usually, franchisors provide various assistance, involving marketing solutions, through the first years of running, and some help to manage an enterprise indefinitely. Guidance and business assistance during operating a franchise help develop the company and increase profits for both parties.
Negotiated supply chain
Usually, franchisors have an already-developed network of suppliers. A franchisee doesn't need to figure out where to get goods or find and establish relationships with suppliers; instead, he or she gets to become a part of a huge distribution chain.
Disadvantages of Franchising
Franchising has many benefits and can lead to real success. Although nothing is perfect. Franchising has some downsides and pitfalls for both business owners and aspiring entrepreneurs. It is essential to note all disadvantages and figure out whether you can accept them.
For a Franchisor
Potential loss of reputation
Each franchise owner is in charge of their own enterprise. The success of the entire network depends on the efficiency of every franchised unit. If a franchise owner does their job poorly or reduces the value of services or products provided, the reputation of the company immediately suffers. And as you know, reputation is a significant component of the establishment’s success and profitability.
Leak of information
The business owner shares with franchise owner the right to use the brand name and, therefore, confidential business information. If a brand has many franchisees, it becomes difficult to control everything and keep track of everyone. Thus, there is a possibility that they could leak some information. This can cause the risk of losing the exclusiveness of the brand, rivals may expose and steal lack of financial privacy, and production technologies and methods.
The risk of legal disputes
Franchising is primarily a business and legal relationship between a franchisor and a buyer. Sometimes one side may express discontent with the way of how things work. This may lead to legal proceedings. Although usually almost all business aspects are presented in the initial franchise agreement, and the future franchise owner sees what he or she is signing up for right away, there are still risks of litigation. Court proceedings are time-consuming and rather expensive.
For a Franchisee
Lack of creative freedom
Usually, the company has a proven reputation that is backed by the collective success of all franchised units. As you become a franchisee, your responsibilities will include keeping up good work and maintaining the company’s course. You don’t have a lot of freedom and need to stick to regulations and guidelines established by the business owner.
Often the franchisor’s lump-sum fees and royalties are very high, and, overall, the initial cost of acquiring a franchise can add up to a large initial investment. Companies with high revenue and wide recognition usually require more capital than less known and profitable ones.
The franchise owner becomes a participant of a huge network. The brand owner has certain values, goals, and an image that franchise owners must uphold. Franchisees are often under enormous pressure not to fall flat on their face and to keep up with the level of performance established by the founder.
Bottom Line: Weighing Pros and Cons on Franchising
As we can see, there are pros and cons of franchising for both franchise buyers and business owners. It is an important decision, and you must take it seriously. Do a research, analyze the opportunities and consider your own abilities and interests. Only you know what’s best for your future. Weigh all upsides and downsides and determine the right path for you.
Founder of Topfranchise.com
CEO Expedition 2009 - 2014
Author of a book «GROW WITH A FRANCHISE»