When it comes to starting a business, the potential of purchasing a franchise can be an attractive option, with the promise of buying into an established brand, operating system and support structure. Franchising offers several advantages over starting a business from the ground up, such as lower start-up costs, access to proven business models and support from the franchisor.
At the same time, the decision to purchase a franchise should not be taken lightly, and there are several potential drawbacks that should be carefully evaluated. Purchasing a franchise involves making an upfront investment and entering into a long-term contract, which requires careful consideration before signing on the dotted line.
In this article, we’ll explore the advantages and disadvantages of franchising to help you determine whether the option is the right choice for you.
Advantages of Franchising
Overall, franchising offers a number of benefits that make running a business easier and more successful. Here are a few of the advantages of franchising:
1. Brand Recognition
One of the primary benefits of franchising is the ability to purchase an established brand. To many consumers, the corporate logo and reputation of a company can simplify the decision-making process when making a purchase, leading to higher sales conversion rates. And because brand recognition often translates into strong customer loyalty, franchised businesses are able to benefit from an existing base of customers.
2. Lower Start-Up Costs
In addition to the benefit of already established brand recognition, purchasing a franchise also allows you to enter the market faster and with reduced start-up costs. This gives franchised businesses a leg up against independent business owners, who must cover the costs of designing and producing a logo, website, signage and marketing materials from scratch.
3. Proven Business Models and Operational Systems
Another major benefit of franchising is the ability to access established and proven business models and operational systems. Instead of having to develop your own systems from the ground up, franchised businesses have access to operational systems that have been refined and tested over time, saving the business owner the time and cost of designing and implementing their own.
4. Turnkey Investment
The concept of a “turnkey investment” is also very attractive to potential franchise owners. This is the idea that an investment can be quickly and easily unlocked and activated by purchasing a plug-and-play business opportunity. Purchasing a franchise allows a person or group to essentially “turn the key” and begin operating a business right away.
5. Support From Franchisor
The final advantage of franchising is the ability to have access to a greater level of support from the franchisor. This includes access to the franchisor’s educational resources, advice on operations and advice on marketing and promotions strategies. Additionally, franchisors provide support in the form of systems and processes to help streamline operations and reduce redundancies.
Disadvantages of Franchising
While buying a franchise can be a convenient way to launch a business, it is not without its disadvantages. Many of these potential drawbacks come in the form of long-term contracts and outsized investments. Here are some of the potential disadvantages of franchising.
1. Royalty Fees
One of the major disadvantages of franchising is the payment of royalties to the franchisor. These fees typically range from 4 to 8 percent of total revenues, and must be paid in order to keep the franchise agreement in force. While paying royalty fees helps to cover the costs of the franchisor’s support and guidance, the funds may be better used towards building the business.
2. Lack of Flexibility
Another potential disadvantage of franchising is the lack of flexibility it can provide. The franchise agreement often outlines a number of restrictions that must be adhered to, ranging from how the business is run to the pricing of products and services. This can be especially troublesome for business owners who are looking for more creative license in how to run and manage their business.
3. Limited Resource Distribution
Finally, the franchisor will typically impose limits on the resources available to the franchisee. This may include restrictions on market territories, the number of franchisees in a given market, and the amount of advertising and marketing support provided. These restrictions can affect the franchisee’s ability to grow the franchise and can ultimately limit earnings.
Which is not a Disadvantage of a Franchise Business?
One of the primary advantages of franchising is that it does not involve inventing the wheel. Franchised businesses can benefit from access to an established and proven business model and support from the franchisor, which can greatly reduce the amount of time and money needed to get a business up and running.
The decision to purchase a franchise should not be taken lightly. Each potential franchise agreement should be carefully considered before signing on the dotted line. While there are many advantages to buying a franchise, there are a number of disadvantages that should be evaluated before making the final decision.