If you’re considering starting your own business one of the important factors and questions that you need to consider is whether you’d prefer to create an independent business or an established franchise. There are numerous advantages to franchising, along with disadvantages for both franchisors and franchisees.
If you are considering whether to join franchising, you must consider all the benefits of franchising. However, you must also consider the risk you could be facing. In this article we’ll go over the pros and cons of franchising to help you determine whether franchising is the best choice for you.
The advantages of franchising to the franchisee
The franchisee is a third-party buyer who purchases rights to use the brand directly from the franchisee (the person who owns the trademark). The franchisee must pay a first annual franchise cost to the franchisor in exchange for the right to use their trademark as well as regular franchise fees to cover royalties, marketing and other fees.
There are many benefits of franchising to the franchisee that include:
1. Assistance for business
One of the advantages of franchising is the assistance in business that they get by the franchisee.
Based on the conditions that the contract for franchises has as well as the nature of the business The franchisee could be provided with a complete turnkey business operation. They could receive the brand, equipment, the supplies, and the marketing plan, which is basically everything needed to run the business.
Different franchises may not have everything but all franchises are able to provide the wisdom and knowledge that the franchisee has. The knowledge they have is either stored in a searchable digital knowledge base, or the number that can be used to contact direct with the franchisee, the franchisee will have access to an extensive pool of support for business to help aid them in the steps of owning and running the business. This knowledge is crucial in running a profitable business , and it makes it easier to start a business starting from beginning from scratch.
2. Brand recognition
One of the biggest benefits franchisees get when they open an organization is the recognition that they receive from their brand. If you begin a new company from scratch, you will need to establish your brand and customer base from the bottom from scratch, which will take some time.
Franchises on the other hand are well-known companies with established customer base that are built-in. Therefore, when you launch the franchise using this famous logo, people will instantly recognize your company’s name and what services you offer as well as what you can anticipate.
3. Lower Failure rate
In general they have a lower rate of failure than sole proprietorships. If a franchisee purchases the franchise, they’re joining the success of a brand along with a network that can provide them with assistance and guidance and make it less likely to go out of their business.
Franchises, too, have proven their concepts for business and you can be confident that the services or products you’ll offer are highly sought-after.
4. Power buying
Another advantage that franchising offers is the scale that the franchise network. If you’re a solo company and require materials or products to make your goods, you’ll have to pay more per item since your order is quite small.
But, a group of franchises offers the chance to purchase products at a substantial discount purchasing the bulk. The parent company may make use of the scale of the group to bargain deals which each franchisee can benefit from. Lower costs for products reduces overall operating cost that the franchise will incur.
5. Profits
As a rule, franchises make greater profits than independently-owned companies. The majority of franchises have well-known brands that attract customers in large numbers. This popularity leads to higher profit. Franchises that have the investment of money upfront to pay for franchise fees get a good return on investment.
6. Lower risk
Beginning a business can be extremely risky. This is the case whether an owner of a business is opening an independently-owned business or buying an existing franchise. However, the risks are lower when you open an franchise.
One reason franchise owners are less risky than owners of independent businesses is because of the franchise network. The majority of franchises are owned and operated by established companies that have proven and tested their business models of franchises in a variety of markets.
This risk reduction could allow you to get access to loans, including the most effective SBA franchise loans that can assist you in launching your own business.
7. Built-in customer base
One of the biggest challenges of any startup is locating customers. Franchises are, however offer instant brand recognition as well as a strong client base. Even if you’re opening your first franchise branch in a small town it is likely that prospective customers already know about the brand due to exposure to commercials on TV or trips in other locations.
8. Make yourself your own boss
One of the greatest advantages of owning your own business is the freedom to be you are your boss. If you decide to start a franchise you can be your own boss and have an added advantage of having assistance from the franchise’s base.
Running a business can be a lot of work However, when you’re the boss, you can set your own hours you can have control over your professional life and even work at your home.
Franchises give you the chance to be your own boss but without the danger of setting up your own independent business.
The disadvantages of franchising for the franchisee
Although there are many benefits of franchising, it’s mistaken to believe that there aren’t some disadvantages. Let us discuss them further.
1. Regulations that are not as restrictive
While a franchise permits the franchisee to become their own boss but they aren’t in total the control of their company or make decisions without considering the views that of their franchisor.
The most difficult disadvantage they have to face is that they must adhere to the guidelines laid within the terms of the franchise contract. The franchisor is able to exert some authority over the vast majority franchise’s business and the decisions made by franchisees.
In accordance with the agreement for franchises the franchisor has the power to regulate the following aspects of the business
Business office
Hours of operation
Holidays
Pricing
Signage
Layout
Decor
Products
Marketing and advertising
Conditions for resales
These restrictions are put in the law to ensure uniformity between franchises as well as the overall brand. However, they can be unsettling and seem to be limiting to the person who is a franchisee.
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2. The initial cost
Although the initial cost that is the fee for franchise offers many benefits for those who are franchisees, they could also be expensive, especially in the case of joining a successful and well-known franchise. Although this can lead into higher revenues, figuring out the initial cash can be an undue burden on any business owner.
If you choose an inexpensive franchise, you’ll probably be required to pay several thousand dollars. Although this could be considered a negative to franchises, it’s essential to consider the potential benefits versus the initial investment to discover the ideal balance for your company. Keep in mind that there are financing options to help to come up with the initial expense.
3. Continuous investment
Alongside the initial investment that you’ll need to make to begin an enterprise, franchises have other ongoing expenses that are exclusive to franchises. In the agreement for franchises the ongoing expenses of the franchise should be included. The costs could include royalties fees, advertising expenses as well as a charge to provide training.
You’ll need to keep these fees in mind while considering whether or not to open an organization.
4. Possibility of conflict
While one of the advantages of owning a franchise the support network you can count on, it is a risk to have conflict. Any business partnership that is intimate that is characterized by an imbalance in power can be a source of conflict if the two parties may not be able to be able to get along.
Although a franchise agreement outlines what is expected of the franchisee as well as the franchisor, the franchisee is given little authority to enforce the agreement without the need for a expensive legal dispute. If it’s because of a an absence of support or an altercation of personality The closeness of the business relationship between the franchisor and franchisee can lead to conflicts. A franchisor needs to examine all prospective franchisees prior to making a decision to do business with them. Additionally, as the franchisee, you must take advantage of this occasion to gauge of the personality of the franchisor and management approach.
5. Insufficient financial privacy
Another drawback of franchising is that it does not provide privacy. The agreement between the franchisee and franchisor will specify that the franchisor will supervise the entire financial system for the company. The lack of financial privacy could be viewed by a franchisees as an issue with having a franchise. However it could be less of a problem in the event that you appreciate financial guidance.
Benefits of franchising to the franchisor
The advantages and drawbacks of franchising aren’t only applicable to the franchisee, but of course. The franchisor must also consider all the benefits and drawbacks prior to making the decision to join this type of business. Before we get started, let’s look at the advantages of franchising the franchisor will take advantage of.
1. Capital access
The biggest obstacles to expanding a small-sized business is the amount of money required to expand. There are many different business loans available however, they do not always work out. The process of establishing a franchise for your business requires some time and effort from your part however, it can earn you lots of dollars in franchise fees.
Expanding your business through franchises allows expansion with minimal debt. The company grows as the franchisees’ capital increases as opposed to taking on debt using loans. The franchisor also shares less risk with the franchisee since the franchisee’s name appears on the deed that identifies the physical site of the business, which reduces the liability of the franchise overall.
2. Growth that is efficient
The process of opening the first business unit is costly and time-consuming. In the case of a second business, it can be just as challenging. If that responsibility is shared by another business owner it improves the efficiency of the process and relieves the burden off the original business owner.
If you are trying to expand your small-scale business, beginning an franchise can help you open more locations a much easier procedure.
3. Little supervision of employees
One of the most stressful things for business owners is managing and hiring employees. As an franchisor, the sole support you need to give to your franchisees is training and business expertise. The franchisor generally does not have any influence on the hiring, management, and firing of employees.
The absence of employee supervision lets the franchisor concentrate on the development of the business , not daily operations. In lieu of stressing about whether or not an employee is present for work or is absent, the franchisee concentrates on the bigger overall picture of success for the business.
4. Brand awareness is increased
One of the benefits of franchising is the increased brand recognition. The more franchises the company has, the greater number of people know about the brand. And the more people are familiar with and love the brand it’s more lucrative and effective the brand will be. The increased awareness of the brand franchises with multiple locations can be extremely beneficial for both the franchisor and franchisees – a win-win.
5. Risk reduction
One of the most significant advantages for the franchisor under an agreement to franchise is the possibility of expanding without risk. Since the franchisee assumes the obligation and debt of opening a business as a franchisee receives all the benefits of the additional location, without taking the risk.
Furthermore, the franchisor is typically protected because the franchise is created as a new company, leaving behind the initial business that is owned by the franchisor to be a separate entity apart from the franchise. A lawyer for franchises can assist to establish the terms to protect this kind of protection in your franchise contract.
Advantages of franchising to the franchisor
While franchisors reap lots of advantages from establishing the franchise but there are also negatives to be aware of.
1. Lack of total brand control
If a business owner starts an independently-owned business they have total control over their brand and each move made by the company.
When a franchisor lets the franchisee to start businesses under their brand it is offering (actually selling) some control over their small-business branding. The franchise agreement must have clear guidelines and conditions to guide the choices taken by the franchisee, your franchisees will not be clones of you. They’ll think and behave differently and your brand might be harmed by it.
2. The potential for litigation is increased.
If you sign an agreement to conduct business with others and you are exposed to the possibility of legal battles. Although a properly-drafted and legal-approved franchise agreement can restrict legal disputes between the franchisees and the franchisor However, legal disputes remain feasible.
Legal disputes that have to be settled through mediation or the court system could be expensive in terms of in time, and also money which can take away the potential for success in the operation.
3. Initial investment
Much discussion is given on the investment franchisees must make to acquire the franchise, it is not considered the initial cost paid from the franchisee.
If a franchisor decides to start an franchise, it’s necessary to pay an initial cost for getting the company operating. A franchisor has to ensure it’s clear and examined by a lawyer who is knowledgeable in the field of franchise law. It is also possible to hire an expert franchise consultant in this procedure. The process of starting a franchise requires the initial expenditure of time and funds from the franchisee.
4. State and federal regulation
Although not a major issue dealing with the federal rules set forth through the Federal Trade Commission for franchises is a headache for franchisors. These rules ensure that franchises are managed fairly however, it requires patience and energy from franchisees to comply with the regulations.
While you don’t need to sign your agreement with Federal government officials, you will need to file it with certain states. You’ll need to ensure that you’re in compliance with the state’s laws. It can be a lengthy procedure, but it can be made more simple with expert advice.
The final word
As with many other business choices purchasing or launching the franchise industry has advantages and disadvantages. Not all franchises or franchises are created equal. It is important to conduct some thorough research prior to choosing the franchise that is right for you, and to fully comprehend all the benefits and drawbacks of franchising you might encounter as a franchisee or the franchisor.