Advantages and Disadvantages of Owning a Franchise
Reading Time: 5 minutes There are many ways in which you can start your own business, however, not all of them provide an equal chance for success. It is quite understandable for someone to be reluctant to invest their money in building the business from scratch, due to the considerable risks that move might pose.
On the other hand, buying an already existing business has its own downsides, mostly related to the amount of money the buyer needs to invest in order to make the business up and running. In that situation, a seemingly ideal solution is franchise ownership.
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What is franchise ownership?
According to the definition by Patrick Gleeson, Ph. D, a franchise business is:
“A business owned by an entrepreneur or an entrepreneurial group, offering a product or service labeled by a corporation that provides assistance in every aspect of the business, in return for a combination of a flat fee, plus fees based on profits or sales.”
Thus, franchise ownership is the act of buying the rights to market and distribute goods and services of an existing franchise for a limited time period. The deal is done between two sides, the owner of the business (franchisor) and the buyer of franchise rights (franchisee).
Simply put, a franchisee pays basic costs and royalties to a franchisor, thus gaining not only the trademark rights but also support from the franchisor and the right to use their business system and routes.
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Franchise Owning vs Start-Up
Buying a franchise provides many advantages, aside from having a well-known brand name at your disposal, that you couldn’t use when starting a business from scratch.
The most prominent benefit of owning a franchise is the fact that you already have a system of operation that is proven on the market, and also a method of training that will teach new workers in how to use it. A lot of start-up entrepreneurs are prone to making beginners’ mistakes, which is thoroughly avoided when you already have a franchise that established its own way of doing business.
Furthermore, good franchisors usually research the market very carefully before selling a new outlet. Absence of appropriate market research is one of the rookie mistakes by independent entrepreneurs, and franchisors usually do that part of the job for franchisees.
One more thing, franchisors usually show franchisees a clear market picture, with all the info about the eventual competition, and they provide the methods to distinguish from them.
Advantages of Owning
The biggest advantage of owning a franchise is that it brings several independent smaller businesses together under a single trademark and business plan.
This approach has many benefits: there is brand awareness, unified work methods, and market strategies, pooled advertising, and higher efficiency. Even individual owners can enjoy a lot of benefits from franchising.
For starters, owning a franchise is a less risky business venture compared to a start-up, because the company is already successful on the market. Having an already established trademark also eliminates the cost of making and advertising a new brand, Next, franchises are quite profitable thanks to all the benefits regarding group advertising and purchase.
Despite having several smaller businesses within, franchises have standardized systems of production, as well as financial and accounting systems. Not to mention, there are ongoing training programs, saving franchisees trouble to learn the ropes through trial and error.
Franchisors also possess real estate resources, a lot of them actually have a formal real estate department within their companies. Good location for the business benefits both the franchisor and franchisee, so finding the perfect spot is a priority for both sides. Last but not least, have in mind that there are many franchise owners ready and generally willing to help. Help from the people who went through and solved the issues you’ve just begun to experience is most appreciated. Just don’t hesitate to ask.
Disadvantages of Owning
By buying a franchise you enter into a formal agreement with your franchisor, which has its own downsides.
First of all, because franchises already present a predetermined brand, your creativity will be quite limited. There are already established production and marketing processes and there’s not much room for improvisation and innovation. The franchisor will also put restrictions concerning territories where you can operate, which products you can sell and which suppliers you can use. Also, an initial investment can be budget-heavy, especially when buying a big-name franchise.
Except for franchise fee you have to pay up-front, you’ll be paying your franchisor a monthly percentage of your gross sales under the label of royalties. There’s no standardized percentage, it changes depending on the type of company.
There’s also the reputation risk. If one of your fellow franchisees make a blunder, the damage done to the whole franchise will spread out and affect all the affiliated sides. By the way, if you thought about conducting the business independently of your franchisor, think again.
In order to make their business model better, franchisors will be collecting all financial information from franchisees, continuously.
Basically, you can say goodbye to privacy. On the other hand, that process is reversible, and franchisors share a lot of their finance info with franchisees. And bear in mind that owning a franchise is not forever. Once your contract with franchisor has ended, they may decide not to renew it, which spells the abrupt end of your franchise endeavor.
Conclusion
Many people consider franchising an easy and simple way to make the first steps into the business realm. The reality, though, is often disappointing, as franchising is no guarantee your business will turn into a remarkable venture. There are no shortcuts to success and in order to own a profitable franchise, you have to be well-informed, hardworking and to manage your time and resources well.
Before investing in a franchise business you have to carefully consider every upside and downside, especially if that investment is hefty. With that said, franchises are still the best way for beginners to make some experience in the business field.
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