Perhaps the main motivation for potential franchisees willing to invest in a franchise or business opportunity is to escape the mundane world of “nine to five” working for someone else to fulfilling a long-cherished dream of business ownership. However it is naïve to think a franchise is the “perfect” business ideal. As with everything in life, there are both advantages and disadvantages, and in the case of franchising this is no different.
If you are aware of the pros and cons of investing in a franchise prior to signing on the dotted line, you are in a much stronger position to make positive changes as you go along. So here is a list of the pros and cons of investing in a franchise…
1. Proven business concept
A franchise should have an established brand name and corporate image before deciding to expand the business concept into franchising. The franchisor should have tested and proven the business model works effectively before expanding it as a franchise operation. You should always check the business model has been successfully proven, by talking to existing franchisees. In this way you know the “hard work” of starting a new business has been completed. It is your job as the franchisee to help the franchise network grow successfully.
2. Reduced Risk
Following from the above, franchising sets out to attract franchisees by eliminating much of the risk associated with starting a new business from scratch. It does this mainly through the franchisor putting the concept to the test of the marketplace and remedying any faults with the system prior to expansion. With the franchisor keeping a watchful eye on business pitfalls that might emerge for franchisees, risk is again reduced. The possibility of failure comes, as the saying goes, with the territory!
3. Combined Resources
The combined strength of a franchise network can have many advantages that a single start-up business can not avail of. The main advantage of the combined network is in the opportunity for franchisees to avail of bulk buying at competitive rates from large suppliers.
A well-established franchise can enjoy the same buying power as big companies can. But you should also double check with a franchise investment that you are either to buy your supplies from head office only or you are allowed to buy from different suppliers depending on time, money and other restrictions. Nevertheless, the extensive buying power of a large franchise network can be advantageous for the growth of a new unit.
4. Finance
It is much easier for a potential franchisee to attain the relevant financial funding from a reputable financial institution than it is for an individual setting up a business from scratch. Why? Banks and other financial organizations “love” the idea of franchising and know only too well the minimal risk associated with lending to a franchisee. That is, the franchisee, albeit he/she may be inexperienced within the business system, has the support and backing of a well-known franchise business model, existing franchisees and of course the franchisor. This makes lending money to a prospective franchisee more attractive than lending to a new business start up.
5. Exclusive Territory
Franchising seeks to eliminate the danger of competition within a specified franchisee territory, by granting each new franchisee the right to operate in a territory exclusive to him or her. However you must be aware that although you can avail of an exclusive territory to conduct your business endeavours, a similar franchise operation to yours can set up shop beside you and there is nothing you can do but rise to the challenge of competition.
As a potential franchisee you should research your preferred area for business and analyze any competition you may have and then ensure the franchisor can grant you exclusivity. This will help your chances of success and potential profitability.
6. Independence
As a franchisee although you may not have full control of the franchise network operations, such as marketing campaigns, business accounts etc, for many franchisees the idea of having someone else guide and help the business grow is a good thing. The overall success and failure of the business will depend on you, and that is a sure mark of being your own person– you should accept that you alone are not the sole author of the business. Franchisees generally are aware of this prior to investing in a franchise and this contributes to the success of the business.
1. Inflexibility
Franchising brings with it a certain amount of inflexibility, that is, the franchise operation and network is governed by a set of pre-described rules and the operations manual set out by a franchisor. This inevitably results in the continual need for uniformity amongst all franchisees involved within the franchise network.
These restrictions can be seen as a point of cohesion and strength. However, if the industry market is unstable, the franchise in general may be slow to react to fast industry changes. This can be frustrating on the part of the franchisee who may want to react to industry changes as they come along, while they must wait from an initiative set down by the franchisor.
The wisest franchisor will overcome this problem by a free flow of regular communication between franchise and franchisees. Regular seminars, conferences and talks will enable difficulties to be raised and solutions sought within a matter of hours. This creates cohesion and a sense of community participation for all involved and the risk of inflexibility decreased dramatically.
2. Not quite your own boss
The tight restrictions franchisors place on controlling the franchise network might appear too constricting for potential franchisees. But it is a necessary pre-requisite for franchisors to keep a tight rein on the franchise network of franchisees in order for the business to grow and expand successfully. The ideal situation is for the franchisor to maintain control over standards while at the same time allowing franchisees sufficient freedom to enjoy running the operation as their own business.
It is impossible for a franchisee not to put their own imprint on the business and in most cases a franchisor is happy to let the personality of the franchisee shine through the business operation. The best franchisors will encourage franchisees to contribute to the development of the whole operation.
3. Regular Royalty Fees
As part of the franchise agreement between you and a franchisor, you will be expected to pay a regular royalty fee at a specified time, how much and how frequently will be a clause stated within the franchise agreement. For some franchisees the idea of paying a regular fee to the franchisor can be a sore point.
However tough this may seem, continuing fees are an important issue to understand before accepting and signing the franchise agreement. You may run your franchise business successfully without the support of the franchisor in the long term.
Nevertheless, the franchisor can urge a franchisee to increase turnover in order to boost the amount paid in fees, which is calculated as a percentage of sales. The franchisee may prefer to increase profitability which does not mean an increase in turnover. This is undoubtedly a potential weakness in a franchise system and one to look out for.
4. The Franchisor- An “Unknown Element”
A potential franchisee does not have long to get to know the business personality of the franchisor in question and if you encounter a difficult relationship with the franchisor after investing, you will have a very troublesome business relationship to contend with.
Therefore, one of the risks associated with investing in a franchise operation is the “unknown element- that is the franchisor- involved. As a franchisee it is up to you to research the franchisor and the business by talking to existing franchisees and asking relevant business questions.
As you can see here from the outline of pros and cons of a franchise investment, the advantages of investing in a proven business model clearly out-weigh the disadvantages, and with careful consideration of the cons a potential franchisee can eliminate the cons quite quickly and focus on the positives of the business operation.
Aine Meade is a Website Editor for Franchise Direct, a leading Internet franchise advertising portal. Aine creates high quality franchise information for its international websites in the U.S., and Europe. Aine has a BA (First) in English and History; MA in Literature & Publishing; Diploma in Media Journalism and a Diploma in Marketing.