Advantages & Disadvantages of Franchising Explained
Starting a franchise business can be a quick move to set up your own business without having to begin from scratch. So, if you are considering investing in a franchise, you must weigh all the advantages of this business model. However, also be aware of some potential risks that can come along.
This piece delivers all the advantages and disadvantages of franchising to help you decide if this business model is the right decision for you. So, read on to know more.
Advantages of Franchising for a Franchisee
A franchise is a business model where an owner licences its operations. This includes offering branding, knowledge, and products in exchange for an amount or a franchise fee.
A third-party buyer or a franchisee purchases brand rights from the brand's owner by paying a fee to the franchisor for using their brand name. Here are some advantages of franchise business for a franchisee:
1. Gain Brand Recognition
Starting a business from scratch will take ample time to receive brand recognition as you have to build your customer base from the beginning. However, this is different for a franchise model since they are already well-known brands having a set customer base.
Therefore, whenever you invest in a franchise, people are already aware of your product and services, thus helping your business to grow.
2. Receive Business Assistance
One of the major advantages of a franchise business is that you receive extensive business assistance and support from the franchisor. However, it depends upon the following:
- Terms of a franchise agreement
- The business model and structure
The assistance is in regards to equipment, brand, supplies, proper advertisement and marketing plan, apart from the knowledge and wisdom of a franchisor. Therefore, even if the business has just started, it runs successfully.
3. Lower Failure Rate
Generally, franchise businesses have a lower failure rate than independent businesses. This is because:
- Entrepreneurs who invest in such a business model become part of a successful brand.
- In addition, they are also gaining a network that ensures support and knowledge.
- With such a business concept, you are assured that customers already like the products and services you offer. Also, they will be in demand.
4. Reduced Operation Cost
If you are part of an independent business, you must purchase and order materials or supplies to make your product. In that case, there can be more investment in an item, even if the order is relatively small.
However, a franchise network buys goods in bulk and gets them at a much-discounted rate. Due to this reduction in the cost of goods and materials used, the operation costs of the franchise decrease.
5. Higher Profits
Another advantage of franchising is that the franchise business model witnesses higher profits than solo-run businesses. This is because one can utilise the opportunity attached to renowned brands, like having large customer bases. Several other reasons allow profits, but this popularity and demand for products initiate maximum profits. Additionally, franchises requiring large amounts of initial investments also witness high returns on investments due to this strategy.
6. Loyal Customer Base
A franchise business model comes with a built-in reliable customer base, loyal to the brand and the products. This results in instant brand recognition, even if you invest in the first franchise branch in a remote destination.
Since your potential customers are already aware of your brand from exposure to media and commercials, you know your products will sell.
Now, let us learn the disadvantages of a franchising model for a franchisee.
Disadvantages of Franchising for a Franchisee
While there are several advantages of the model, you must also be prepared for its disadvantages:
1. Strict Regulations
Though you will be your boss as a franchisee, you can only partially control the business. This includes:
- Before making any decisions, you are required to follow the restrictions laid out by the franchise agreement.
- Additionally, the franchisor can apply control over most of the business, which can hinder your decision-making.
These decisions allow uniformity in different franchises in different locations but can be burdensome for the franchisee.
2. Initial Investment
An initial investment of the ‘franchise fee’ can carry several benefits for the business but can be costly if you join a renowned and profitable setup. Although it can regulate large profits, this huge initial investment can stress out a small entrepreneur.
If this is the case, look for several financing options to help you begin the business.
3. Several Ongoing Costs
Besides the initial investment, there are several ongoing costs incurred while you plan to start your franchise business. These are already mentioned in the agreement and include the following:
- Royalty fees
- Charges for the training and development of workers
- Advertising costs
Keeping these factors in mind, one should decide when and how to start a franchise business.
4. Lack of Privacy
Lack of privacy is one of the biggest disadvantages of a franchise business. In addition, the agreement will mention that the franchisor will oversee the financial ecosystem of the setup. However, this reduction in financial privacy can be a burden on the franchisee.
Nevertheless, welcoming knowledge and financial guidance will only build the brand and contribute to the company's growth which is the only motto.
5. Reason for Conflict
A franchise model has many benefits due to the vast network of support you gain, but it also risks conflicts. Although the agreement describes both the franchisee and franchisor’s involvement, a franchisee has minimal power to exert. This results in a lack of support and a rife for conflict.
However, one can avoid these conflicts if a franchisor screens all the potential entrepreneurs before entering into business with them. Additionally, a franchisee can use this opportunity to understand the franchisor's reputation and personality, which will help in the long run.
Advantages of Franchising for a Franchisor
The pros and cons of the franchising business model do not apply to a franchisee only. A franchisor must also understand the advantages and disadvantages before entering into business. Here are the advantages:
1. Access to Capital
Capital is the biggest aspect that helps in the expansion of any business. While several financial options are available to entrepreneurs, they might not work sometimes. In that case, franchising helps in making money in the form of franchise fees. Therefore, instead of incurring debt through loans, individuals can try franchising to expand the business as capital becomes available.
In addition, the franchisor shares minimal risk with the franchisee as a franchisee also becomes a part of the setup, lowering the liability.
2. Excellent Growth
Starting a unit of a business for the first time is time-taking and difficult. However, when this responsibility is shared with another entrepreneur, the process becomes efficient. It is because:
- It allows the business and the brand to grow and reach more customers.
- If you are willing to grow your small business, you can start a franchise at multiple locations, followed by a sound business strategy.
3. Lower Risk
One of the most significant advantages of a franchisor is that there is minimal risk included in a franchise model. This is because a franchisee takes on the liability of the setup. While on the other hand, a franchisor enjoys the benefit of an additional location and more customer base.
4. Enhanced Brand Awareness
The more locations a brand enters, the more people get aware of the brand and its products. Therefore, as they start buying products and get satisfied, they become loyal partners to the brand. This, in turn, pushes profits and success. So, enhanced brand awareness is extremely beneficial to a franchisor.
5. Minimal Supervision
One of the biggest problems any businessman faces is hiring and managing employees. When you enter into a franchise agreement with an entrepreneur, it is the franchisee’s work to arrange for human resources. They provide training and knowledge to workers and employees, thus allowing minimal supervision of the franchisor.
Disadvantages of Franchising for a Franchisor
Although franchisors gain several benefits while starting a franchise business, there are several disadvantages of franchise business as well:
1. Minimal Brand Control
Entrepreneurs who start an independent business model have complete control of the brand and make decisions freely. However, a franchisor enters into an agreement with a franchisee to start a setup under their brand. So, they willingly have to give away some control over their business. A franchisor does this, keeping in mind the growth of the business.
2. Potential for Legal Issues
Another disadvantage of franchising for franchisors is that there are risks of potential legal disputes as you enter into a close agreement with a brand. While a well-designed franchise agreement limits several possibilities for legal issues between the two, disputes are still a possibility.
These disputes must be resolved through mediation and patience, keeping the brand's reputation in mind.
3. Initial Cost
As a franchisor begins a new setup, a specific cost and investment are involved in getting the business running. Therefore, both parties must formulate these terms and clarify the amount details in the agreement.
If not, this can lead to financial disputes and struggles. In this case, hiring a franchise consultant is a good idea to prevent conflicts.
4. State Regulation
Although this is not a drawback, dealing with several state regulations for franchises can be burdensome for franchisors. These guidelines ensure that these businesses run smoothly but require time and effort on the franchisor's behalf to meet them.
In some instances, franchisors also have to file agreements with certain states. For that, franchisors must ensure that they know about the various state laws.
The above information might have given you an idea about the advantages and disadvantages of franchising. Being your boss allows autonomy over your career and gives you a lot of freedom to run the business. However, it is necessary to research before finalising a franchise that is appropriate for you.