If you&#;re looking 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. There are many advantages of franchising, as well as disadvantages&#;for both franchisees and franchisors.
When considering if you want to get involved with a franchise, you need to weigh all the benefits of franchising, but also all the potential risks you might face. In this guide, we&#;ll outline these pros and cons so you can decide if franchising is the right move for you.
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Advantages of franchising for the franchisee
The franchisee is the third-party buyer who purchases the brand rights from the franchisor (the owner of the brand). The franchisee pays an initial franchise fee to the franchisor for the rights to use their brand in addition to ongoing franchise fees for marketing, royalties, and more.
There are several advantages of franchising for the franchisee, including:
1. Business assistance
One of the benefits of franchising for the franchisee is the business assistance they receive from the franchisor.
Depending on the terms of the franchise agreement and the structure of the business, the franchisee might receive essentially a turnkey business operation. They may be provided with the brand, the equipment, supplies, and the advertising plan&#;essentially everything they need to operate the business.
Other franchises may not provide everything, but all franchises provide the knowledge and wisdom of the franchisor. Whether that knowledge is stored in a searchable, digital knowledge base or is a number to reach the franchisor directly, the franchisee has access to a deep reservoir of business assistance to guide them through the process of owning and operating a business. This knowledge can be essential to running a successful business and makes it much easier than starting a business from scratch.
2. Brand recognition
A big benefit that franchisees receive when opening a franchise is brand recognition. If you start a business from scratch, you would have to build your brand and customer base from the ground up, which would take time.
Franchises, on the other hand, are already well-known businesses with established customer bases built in. 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.
3. Lower failure rate
In general, franchises have a lower failure rate than solo businesses. When a franchisee buys into a franchise, they&#;re joining a successful brand, as well as a network that will offer them support and advice, making it less likely they&#;ll go out of business.
As well, franchises have already proven their business concept, so you have reassurance that the products or services you&#;ll be offering are in demand.
4. Buying power
Another benefit of franchising is the sheer size of the network. If you&#;re operating a standalone business and need to order products or supplies to make your products, you&#;re paying more money per item because your order is relatively small.
However, a network of franchises has the opportunity to purchase goods at a deep discount by buying in bulk. The parent company can use the size of the network to negotiate deals that every franchisee benefits from. A lower cost of goods lowers the overall operation costs of the franchise.
5. Profits
In general, franchises see higher profits than independently established businesses. Most franchises have recognizable brands that bring customers in droves. This popularity results in higher profits. Even franchises that require a high initial investment for the franchise fee see high return on investment.
6. Lower risk
Starting a business is risky. This is true whether a business owner is opening an independent business or purchasing a franchise. That being said, the risk is lower when opening a franchise.
One of the reasons franchise owners face lower risk than independent business owners is the franchise network. Most franchises are owned by established corporations that have tested and proven the business model of the franchise in multiple markets.
This lower risk may also make it easier to access loans, including the best SBA franchise loans, to help you launch your business.
7. Built-in customer base
One of the biggest struggles of any new business is finding customers. Franchises, on the other hand, come with instant brand recognition and a loyal customer base. Even if you&#;re opening the first branch of a franchise in a small town, the likelihood is that potential customers are already familiar with the brand from exposure to TV commercials or travel to other cities.
8. Be your own boss
One of the biggest benefits of owning a business is being your own boss. When starting a franchise business, you get to be your own boss with the added benefit of receiving support from the franchise&#;s knowledge base.
Owning a business is hard work, but when you&#;re your own boss, you get to create your own schedule, have autonomy over your career, and potentially work from home.
A franchise gives you the benefit of being your own boss without the risk of starting your own independent business.
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Disadvantages of franchising for the franchisee
While there are many advantages of franchising, it would be remiss to think there aren&#;t also disadvantages. Let us explain further.
1. Restricting regulations
While a franchise allows the franchisee to be their own boss, they&#;re not entirely in control of their business, nor can they make decisions without taking into account the opinion of the franchisor.
For most franchisees, the most frustrating disadvantage that they face is that they must follow the restrictions laid out in the franchise agreement. The franchisor can exert a degree of control over the majority of the franchise business and decisions made by the franchisee.
Depending on the franchise agreement, the franchisor can control any of these aspects of the business:
These restrictions are put into place to maintain uniformity between the different franchises and the overall brand, but they can also be frustrating and feel limiting for the franchisee.
2. Initial cost
While the initial investment of the franchise fee buys a lot of benefits for the franchisee, it can also be costly&#;especially if you&#;re joining a very well-known and profitable franchise. While this often translates to larger profits, coming up with this initial money can put a strain on any small business owner.
Even if you opt for a low-cost franchise, you&#;ll likely still have to front a few thousand dollars. While this can be seen as a disadvantage of franchises, it&#;s important to weigh the opportunity against the initial investment and find the right balance for your business. And keep in mind, there are also franchise financing options to help you come up with this initial cost.
3. Ongoing investment
In addition to the initial investment you&#;ll have to provide to start your franchise, there are additional, ongoing costs that are unique to franchises. Within the franchise agreement, the ongoing costs of the franchise should be enumerated. These costs might include royalty fees, advertising costs, and a charge for training services.
You&#;ll want to keep these ongoing fees in mind when you&#;re deciding whether to start a franchise.
4. Potential for conflict
While one of the benefits of owning a franchise is the network of support you receive, it also has the potential for conflict. Any close business relationship, especially when there&#;s an imbalance of power, comes with a risk that the parties won&#;t get along.
While a franchise agreement states the expectations of both the franchisee and franchisor, the franchisee has minimal power to enforce the franchise agreement without a costly legal battle. Whether it&#;s lack of support or simply a clash of personalities, the closeness of the business relationship between franchisor and franchisee is rife for conflict. A franchisor should screen all potential franchisees before entering into business with them, and as the franchisor, you should also use this opportunity to get a feel for the franchisor&#;s personality and management style.
5. Lack of financial privacy
Another disadvantage of franchising is a lack of privacy. The franchise agreement will likely stipulate that the franchisor can oversee the entire financial ecosystem of the franchise. This lack of financial privacy can be seen by franchisee as a disadvantage of owning a franchise; however, it may be less of an issue if you welcome financial guidance.
Advantages of franchising for the franchisor
The advantages and disadvantages of franchising don&#;t solely apply to the franchisee, of course. The franchisor should also weigh the pros and cons before deciding to enter into this business model. First, let&#;s explore the benefits of franchising that the franchisor can enjoy.
1. Access to capital
One of the biggest barriers to expansion for small business is the money it costs to expand. And while there are several business loan options, they don&#;t always pan out. Franchising your business will take some time and money on your end, but it also has the potential to make you a lot of money in the form of franchise fees.
Expanding your business as a franchise allows you to expand with little debt. The business expands as capital becomes available from franchisees instead of taking on debt through loans. The franchisor also shares minimal risk with the franchisee because the franchisee puts their name on the deed for the physical location of the business and lowers the franchises overall liability.
2. Efficient growth
Opening the first unit of a business is costly and time consuming. Opening a second unit can be almost as difficult. When that burden is shared with another business owner, it makes the process more efficient and takes the onus off the initial business owner.
When trying to grow your small business, starting a franchise can make opening multiple locations a much simpler process.
3. Minimal employee supervision
One of the big stresses as a business owner is hiring and managing employees. As a franchisor, the only support that you have to provide to the franchisee is training and business knowledge. In general, the franchisor has no hand in the management, hiring, and firing of employees.
This minimal employee supervision allows the franchisor to focus on the growth of the business instead of day-to-day operations. Instead of worrying about whether an employee shows up for their shift or not, the franchisor is focused on the big picture for business success.
4. Increased brand awareness
One of the many benefits of franchising is increased brand awareness. The more locations the brand has, the more people who are aware of the brand. And the more these customers come to know and love the brand, the more profitable and successful the brand can be. This increased brand awareness of a multi-location franchise can be highly beneficial to the franchisor and their franchisees&#;a win-win.
5. Reduced risk
One of the biggest benefits to the franchisor in a franchise agreement is the ability to expand without an increase in risk. Because the franchisee takes on the debt and liability of opening a unit under the name of the franchise, the franchisor gets all the benefit of an additional location without taking on the risk themselves.
Additionally, the franchisor is often further insulated because the franchise is incorporated as a new business entity, leaving the original business owned by the franchisor as a separate entity from the franchise. A franchise lawyer can help to set up the terms for this type of protection within the franchise agreement.
Disadvantages of franchising for the franchisor
While franchisors receive a lot of benefits from starting a franchise, there are also some disadvantages to consider.
1. Loss of complete brand control
When a business owner opens an independent business, they maintain complete control over their brand and every decision that happens within the business.
When a franchisor allows a franchisee to open a business under their brand, they&#;re giving away (actually, selling) some of the control over their small business branding. While the franchise agreement should contain strong stipulations and rules to guide the decisions made by the franchisee, your franchisees won&#;t be clones of you. They will think and act differently, and your brand could wind up suffering because of it.
2. Increased potential for legal disputes
Any time you enter into a close business agreement with other people, you open yourself to the risk of legal disputes. While a well-crafted and lawyer-approved franchise agreement should limit a lot of the possibilities for legal disputes between the franchisor and franchisees, these disputes are still possible.
Any legal disputes that must be resolved in mediation or through the court system can be costly in both time and money, which takes away from the success of the franchise.
3. Initial investment
While much conversation is devoted to the initial investment that a franchisee must make in the franchise, that ignores the initial cost that is taken on by the franchisor.
When a franchisor starts a franchise, there&#;s a startup cost to get the business in operation. A franchisor must make sure that the franchise agreement is written clearly and reviewed by a lawyer experienced in franchise law. You may also hire a franchise consultant for expertise during this process. Starting a franchise requires an initial investment of both time and money on the part of the franchisor.
4. Federal and state regulation
While not entirely a drawback, dealing with the federal regulations set down by the Federal Trade Commission for franchises can be a nuisance for franchisors. These regulations ensure that franchises are operated fairly, but it also requires time and effort from the franchisors to meet all of these regulations.
And while you don&#;t have to file your agreement with the federal government, you do have to file with some states&#;and you will have to make sure you&#;re compliant with different state&#;s laws. This can be a time-consuming process, but can be made easier with professional guidance.
The final word
Like most other business decisions, starting or buying into a franchise has its pros and cons. And not all franchises or franchise relationships are created equally. It&#;s important to do research before choosing the franchise that&#;s right for you and to understand all the advantages and disadvantages of franchising that you may come across as either the franchisee or franchisor.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.
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