If you’re considering starting your own business one of the main factors and questions that you need to consider is whether you’d like to establish an independent company or the franchise. There are many benefits to franchising, along with disadvantages, both for franchisors and franchisees.
If you’re considering whether to join the franchise model, you have consider all the benefits of franchising, as well as the risk you could encounter. 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.
Benefits of franchising to the franchisee
The franchisee is a third-party purchaser who buys the rights to use the brand directly from the franchisee (the proprietor of the name). The franchisee must pay a first cost for franchise to the franchisor to acquire the right to use their name as well as annual franchise fees for royalties, marketing and other fees.
There are many benefits of franchising for franchisees for the franchisee, such as:
1. Assistance to businesses
One of the advantages of franchising is the support for business they get through the franchisor.
In accordance with the conditions in the agreement as well as the nature of the business the franchisee may be provided with a complete turnkey business operation. They might be given the brand, equipment, the supplies, and the marketing plan, which is basically everything they require to run the business.
Different franchises may not have everything but all franchises are able to provide the expertise and experience from the company that they are franchising. The knowledge they have is either stored in a searchable digital knowledge base, or the number that can be used to contact an individual franchisor, the franchisee will have access to an extensive pool of assistance for businesses to aid them in the steps of owning and running an enterprise. This knowledge is crucial in running a profitable business , and it makes it simpler than starting a new business starting from beginning from scratch.
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2. Brand recognition
One of the biggest benefits franchisees gain when opening the franchise is recognition of their brand. If you begin a new company from scratch, you must build your brand and customers from the ground starting from scratch, which takes some time.
Franchises on the other hand are already well-known business with established customer base established. Therefore, when you launch an franchise that has this well-known logo, people will instantly recognize your company’s name and the services you provide in addition to what customers 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 an established brand along with a network that can provide them with assistance and guidance which makes it less likely to go out of their business.
Franchises, too, have proven their concepts for business which gives you confidence that the services or products that you’ll provide are popular.
4. Power buying
Another advantage that franchising offers is the dimension of the company’s network. If you’re a solo business and you need to purchase materials or products to make your goods, you’ll have to pay more for each item because the amount you order is small.
But, a group of franchises can offer to purchase products at a substantial discount purchasing the bulk. The parent company may benefit from the scale of the networks to strike deals each franchisee can benefit from. Lower costs for products reduces overall operating expenses that the franchise will incur.
5. Profits
The majority of franchises earn 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 have a high ROI.
6. Lower risk
The process of starting a business can be extremely risky. This is true regardless of whether an owner of a business is opening an independent company or purchasing the franchise. However, the risks are lower when you open the franchise.
One of the main reasons franchise owners are less risky than business owners who are independent is due to the franchise system. The majority of franchises are owned by established companies who have tried 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 company.
7. Built-in customer base
One of the biggest challenges for any business that is new is locating customers. Franchises however have instant brand recognition as well as a strong client base. Even if you’re opening your initial branch of a franchise in a small city, it is likely that prospective customers already know about the brand due to exposure to television commercials or visits in other locations.
8. Make yourself your own boss
One of the most significant advantages of owning your own business is the freedom to be you are your boss. When you start a franchise company you can be your own boss, with additional benefits of getting support from the franchise’s base.
Running a business can be a lot of work However, being your own boss, you can set your own hours you can have control over your professional life and possibly work at your home.
Franchises give you the chance to be your own boss, without the risks of setting up your own independent business.
Advantages of franchising to 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. Regulating restrictions
While a franchise permits the franchisee to run their own business but they aren’t in total control of their own business and cannot make decisions without considering the opinions from the franchisee.
The most difficult disadvantage they confront is the fact that they have to adhere to the guidelines laid within the terms of the franchise contract. The franchisor is able to exert some degree of authority over the vast majority franchise’s operations and the decisions taken by franchisees.
In accordance with the agreement for franchises the franchisor has the power to regulate the following areas of the business:
Business office
Hours of operation
Holidays
Pricing
Signage
Layout
Decor
Products
Marketing and advertising
Conditions for resales
The restrictions put in the place to ensure consistency among the franchises and the overall brand. However, they can be unsettling and seem to be limiting on the part of the franchisee.
2. The initial cost
Although the initial cost in the form of a franchise cost provides many benefits for an owner, the cost could also be expensive, especially when you’re joining a popular and lucrative franchise. Although this can lead to higher revenues, figuring out this amount of money at first can place the financial burden on any business owner.
If you choose an affordable franchise, you’ll probably be required to pay some thousand dollars. Although this could be considered a negative for franchises it’s crucial to consider the potential benefits versus the initial investment to discover the ideal balance for your company. Remember, there are franchise financing options that can help you to come up with the initial expense.
3. In-continuing investment
Alongside the initial capital investment you’ll be required to put into an enterprise, franchises have other ongoing expenses which are specific to franchises. In the franchise agreement the ongoing expenses of the franchise should be included. This could include royalty fees, advertising expenses, and even a fee to provide training.
It is important to keep these fees in mind when making a decision about whether you want to launch an organization.
4. Possibility of conflict
While one of the advantages of having a franchise is the community of support that you get, it can be a source of conflict. Any business relationship that is close 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 that the obligations of the franchisor as well as the franchisee, the franchisor has only a limited ability to enforce the agreement without having to engage in a expensive legal fight. It doesn’t matter if it’s a the lack of support or an altercation of personality and personalities, the closeness of relationship between the franchisor as well as the franchisee can lead to conflicts. The franchisor must examine all prospective franchisees prior to making a decision to do business with them. Additionally, as the franchisee, you must make use of this chance to gain a sense of the personality of the franchisor and management manner.
5. Privacy of finances is not protected
Another drawback of franchising is the lack of privacy. The agreement for franchises will state that the franchisor is able to supervise the entire financial system for the company. The lack of financial privacy could be viewed by a franchisees as a drawback of having a franchise. However it might not be as much of a concern in the event that you appreciate financial guidance.
The advantages of franchising for the franchisor
The advantages and drawbacks of franchising aren’t only applicable to the franchisee of course. The franchisor needs to weigh all the benefits and drawbacks prior to choosing to participate in this model of business. Before we get started, let’s look at the benefits of franchising the franchisor could benefit from.
1. Capital access
The biggest hurdles to expanding a small-sized business is the amount of money required to expand. There are many loans for businesses but they aren’t always a good fit out. Franchises for businesses will require some time and effort for you However, it also can earn you lots of dollars in franchise fees.
Expanding your business with franchises allow you to expand without debt. The business grows when 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 overall risk of the franchise.
2. Effective growth
The first business unit is costly and time-consuming. The process of opening a second one isn’t as easy. If the task is shared with a different business owner it improves the efficiency of the process and reduces the burden on the business’s original owner.
In the case of growing your small-scale business, beginning an franchise can help you open multiple locations a simpler procedure.
3. The employee’s supervision is minimal
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 franchisee is education and business expertise. The franchisor generally is not involved in 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. instead of worrying whether or not an employee is on time to work or is absent, the franchisee will be focused on the larger picture of business success.
4. Brand awareness is increased
One of the many advantages of franchising is the increased brand recognition. The more places the brand has, the greater number of people know about the brand. The more customers become familiar with and appreciate the brand greater the chance of being profitable as well as profitable the brand could be. The greater brand recognition of franchises with multiple locations is extremely beneficial to both the franchisor and franchisees – a win-win.
5. Risk reduced
One of the greatest advantages for the franchisor under an agreement to franchise is the possibility of expanding without risk. Since the franchisee is responsible for the risk of debt and responsibility for opening a new location as a franchisee receives all the advantages of having an additional location , but does not take on the risk.
In addition, the franchisor usually protected by the fact that the franchise is registered as a new company, leaving behind the previous business that is owned by the franchisor as an independent entity in relation to the franchise. A lawyer for franchises can assist in drafting the conditions to protect this kind of protection in the agreement for franchises.
Advantages of franchising to the franchisor
While franchisors reap lots of benefits when they start the franchise however, there are some negatives to take into consideration.
1. Lack of total brand control
When a business-owner starts an independently-owned business they are in total control over their brand and each decision made within the company.
If a franchisor permits an franchisee to establish businesses under their brand the franchisor is offering (actually selling) some control they have over their small business branding. Although the franchise agreement should include clear rules and stipulations to guide the choices taken by the franchisee your franchisees will not be clones of you. They’ll act and think differently and your brand may be harmed by it.
2. Potential for increased risk of legal disputes
When you sign an agreement to conduct business with others and you are exposed to the possibility of legal issues. Even though a well-written and approved by a lawyer franchise agreement will reduce legal issues between the franchisees and the franchisor However, legal disputes remain feasible.
Legal disputes that need to be settled through mediation or the court system could cost both in time, and also money which can take away from the overall success in the operation.
3. Initial investment
Much discussion is given on the investment franchisees must make to acquire the franchise, this does not take into account the initial cost assumed from the franchisee.
When a franchisor begins an franchise, it’s necessary to pay the cost of starting the business up and running. The franchisor should ensure that their franchise contract is clear and scrutinized by an experienced lawyer in the field of franchise law. You can also engage a franchise consultant to help throughout the procedure. The process of starting a franchise requires an investment in time and cash from the franchisee.
4. State and federal regulation
Although not a major issue dealing with the federal guidelines laid out in the Federal Trade Commission for franchises could be a hassle for franchisors. These rules ensure that franchises are run in a fair manner and efficiently, however it takes an effort and time from franchisors to adhere to all the regulations.
Although you don’t have to submit your agreement to Federal government officials, you will have to file with certain states. And you’ll have to ensure that you’re in compliance with the state’s laws. It can be a lengthy procedure, but it can be made simpler with the help of a professional advice.
The final word
As with all business decisions making, buying or starting the franchise industry has advantages and disadvantages. There are a variety of franchises and franchises are created equal. It is important to conduct some study prior to selecting the franchise that is right for you. You should also be aware of all the benefits and drawbacks of franchising. You could encounter as a franchisee or the franchisor.