The list of advantages and disadvantages of franchising is a topic that will be of interest to all people who are considering options for involvement in this type of business. You are probably already familiar with what franchising is, so you know what will be expected of you. This type of business is one of the most popular business models in the US, but it is also spreading rapidly throughout the whole globe. Therefore, it is worth learning as much as possible about this topic.
We have more than 750,000 franchises in the US today, which shows that this type of business is becoming more popular every year. Franchising gives people the opportunity to start their business more easily, even without previous experience in management. The only drawback is that you will need to have some money savings (start-up capital), but there are available various low-budget franchises on the market so that even people who do not have large savings will be able to find something for themselves.
At the beginning of this article, we will underline one main advantage and one main disadvantage of franchising, and later we will focus on revealing the smallest pros and cons of this way of doing business.
What is The Main Advantage of Franchising
The biggest advantage of franchising is that you will reduce the risk of business failure by buying a franchise. We will now explain in more detail why this is and how to use the franchisor’s knowledge for your business success.
It’s a huge difference to start with a proven franchise business compared to an insecure stand-alone business. Successful franchised companies are been developing their system of operation over the years and they tested it in dozens or hundreds of locations in many countries. Your chances of success are incomparably better compared to entrepreneurs who decide to start on their own. The franchisor has made a lot of mistakes in the past and it will pass that knowledge on to you in order to teach you how to avoid making business mistakes.
The first and basic advantage of franchising is in the fact that people can get the opportunity to enter a business in which the largest number of possible mistakes have already been made. This does not mean that when you buy or start a franchise, there is no possibility of business failure, but the fact is that if you choose the right franchisor, you will certainly not be in a situation to make a cardinal mistake that will ruin your business.
Statistics have shown that franchising compared to starting an independent business is a much safer business concept.
Statistics say that 20% of the US small businesses that are launched fail in the first year and that most of the franchise affiliates operate successfully even after five years of operation. Of course, the franchisee and the franchisor must ”match up” and work together on system development. So this is one of the biggest advantages for the franchisee – you have a better chance of business success.
When you buying or starting a proven concept, you avoid many mistakes that you would very likely make if you start on your own. Every entrepreneur knows that business mistakes cost a lot of money and time and they can even ruin a business.
Through years of working in many locations, the franchisor has developed a formula that works. A good franchisor has everything systematized and make ready for you – from marketing, branding, criteria for the required location, criteria for your future employees, approved suppliers, and much more.
Think about how much it would take you as a beginner to develop the right business formula and how much it would cost you?
What is The Main Disadvantage of Franchising
The biggest disadvantage of franchising is that you can’t be creative. By purchasing a franchise, you agree to play by the rules; you must abide by all the terms you have signed in the franchise agreement. This means that your services and product are predefined, and you can’t offer or sell your own service and products inside the franchise.
From the point of view of the franchisor (the owner of the concept), the franchise is a sustainable model that is structured that it can operate in a number of other locations without the personal presence and participation of the provider. The originality of the concept plays an important role in the success of the franchise because it affects the acceptance by end customers and clients.
The franchisor ensures the originality of its brand by offering the same products and the same quality of service in all locations. For example, you won’t notice any difference between McDonald’s in Iowa and one in Massachusetts.
In order for you to succeed as a franchisee, it is crucial that you carefully choose the brand to which you will tie your business future. First of all, you need to consider whether franchising is the right choice for you at all.
Ask yourself these questions:
- Are you ready, and can you follow the rules set by someone else?
- Can you accept the rules of the system by consistently applying the transferred know-how and are you ready to follow the advice and recommendations of the franchisor?
It will be a complete waste of time for the franchisee if he starts coming up with already invented ideas. It is not the job of the recipient to change the rules of the game that he accepted at the beginning of the collaboration. You as the franchisee can talk to the franchisor, share your experience, but the final word is always from the franchisor.
This is so because the provider, will not allow the recipient to make mistakes that he as the franchisor has made in the past. And that, as we have already said, is one of the biggest advantages of franchising.
Franchising is not for everyone. If you are a person who loves to innovate, you are creative, and you always follow your own visions, doing business in a franchise system may not be for you. We will repeat again that when you become a franchisee; you agree to follow certain predefined rules.
List of Franchising Advantages and Disadvantages for Franchisees
The franchise relationship would not have developed if the franchisee had not seen the advantages of doing business according to a proven business recipe and under the well-known name of the franchisor. And because of that fact franchising is very popular in the US.
The most significant franchising advantages are:
- Lack of business knowledge and experience can be compensated by training
- Use of a successful and well-known business name and reputation
- The recipient is an independent entrepreneur
- One franchisee can open multiple facilities
- Lower risk of failure
- Standardized product quality is offered through a certified business system
- Assistance in choosing a location and running a business
- Benefits from the franchisor’s development program
The advantage of entering the franchise network is access to knowledge, information (know-how), and strategies – access to the franchisor’s development program. With relatively little capital and investment, the franchisee has access to economic development solutions. Solutions that they would otherwise have to find themselves, and which would require significant time and significant investment.
The franchisee works “under the patronage” of a brand that is already known and present in the consumer’s mind. This makes it much easier to attract customers. Franchisees also benefit from the reputation, trademark, copyright, business skills, and other manufacturing procedures and secrets of success that are owned by the franchise system.
Disadvantages of franchising for franchisees are:
- Loss of independence
- Potentially excessive dependence on the franchisor
- Strict product and service rules
- Cost of the initial, royalty, and marketing franchising fees
For some franchisees, an additional disadvantage is the necessary constant compliance with the contract and standards prescribed by the franchisor and the franchise system, and the fees must be paid regardless of the financial condition of the franchisee.
What Support Will Provide Franchisor to The Franchisee
By signing the franchise agreement, the franchisor accepts the obligation to provide the necessary support to the recipients, so that they also have a chance to achieve success equal to his.
The franchisor’s assistance includes:
- Support in finding a suitable space or a satisfactory location
- Assistance in opening a franchise business unit
- Assistance in determining the quantity and range of goods that will be offered for sale
- Providing training for franchisees and their staff about business management, product preparation or service practice (eg restaurant menu), finance, accounting, planning, and control of marketing and promotional activities.
Communication with the franchisor is on a daily basis, so the franchisee should not hesitate to ask for help or advice. Communication usually takes place via Skype or telephone, and in the beginning, you will have the help of a franchise representative who will come to your location physically.
If you need help in negotiation with a new supplier or help in choosing a new location or if any technical system is not working, and you want professional help from a person who has experience with it the franchisor is ready to help you to solve all the issue that you have.
Also, when we doing a list of the advantages and disadvantages of franchising we must mention a network of franchisors who help each other. Often franchisees have a closed forum / social networks where they exchange experiences and answer questions from colleagues. So a base of experienced franchisees will be at your disposal to answer any question that bothers you.
The Advantages and Disadvantages of Franchising For The Franchisor
Franchising advantages for the franchisor:
- Small capital required for rapid growth
- Potentially high growth rate
- Minimized business and financial risks
- Highly motivated and committed management of every facility
- Better market communication
- Better distribution of goods
- Reduced administration costs and problems
- Continuous trademark protection through franchise agreements
- Common business interests with the franchisee
- Faster establishment of overseas facilities
- Better management skills
- Benefits of local knowledge
- The greater motivation of associates
- Making profit thru royalty fees on the monthly or yearly basis
The main advantage of franchising for the franchisor is that it can achieve faster growth with less capital investment and can have a potentially high growth rate. The franchise brings to the provider minimization of business and financial risks. Opening new facilities by entering new markets with less investment and lower risk promotes this business concept and a lot of entrepreneurs want to take part in it.
All these advantages together lead to an increase in profits and an increase in the income of the provider. This gives an increase in the value of the franchise system, and because of that, it is easier to find new franchisees. But, when we talk about advantages we must mention also the disadvantages of franchising for the franchisors.
Disadvantages of franchising for the franchisor:
- Developing a sense of independence and complacency (comfort zone) by the recipient of the franchise after a period of danger
- Difficulty in controlling standards
- Difficulty in dictating business policy
- The possibility of developing mistrust between the parties
- Success often depends on the way the franchisee thinks
- It is often difficult to secure cooperation
- Communication problems
- Difficulties in finding the best franchisees
- Generally more delicate interpersonal relationships
This business relationship is not only giving advantages often franchising can brings and disadvantages to the franchisor. The biggest drawback is often the reduced ability to control their own organization, potential non-compliance with business procedures by the recipient, possible problems in relations with franchisees, as well as lack of trust.
Further disadvantages are reflected in the transfer of business policy and possible disobedience of the franchisee who has developed a sense of independence and autonomy after passing initial business problems. As people play the biggest role in the success of any franchise, the disadvantage for the provider is that it cannot influence the employment policy of the franchisee and that can result in less quality service than is expected.
Common Misconceptions About Franchising
When we talk about the advantages and disadvantages of franchising, we must also mention many misconceptions about this type of business. It is no wonder that people who think about buying a franchise often don’t know if this is the right business concept for them.
4 most common misconceptions about franchising:
1. The franchisee is the owner of the brand
When it comes to franchising, this is probably one of the most common misconceptions. We will not make a mistake if we say that this misconception comes from a lack of knowledge. Many people still don’t understand how the business model of franchising works, that is, who is a franchisor and what a franchisee receives.
We must remind you that franchising is a form of cooperation between providers and recipients of franchises. The franchisor, for a fee, offers its business concept, know-how, and its brand’s trademarks to other independent entrepreneurs who will be managers of these particular franchises.
Recipients only acquire the right to operate under the provider’s brand, and they can use and apply the proven business procedures. The franchise agreement, which is signed between the franchisor and the franchisee, contains the terms of the sale and purchase of the franchise.
Indeed, the conditions of cooperation between these two legal entities, their obligations, and rights can be different from case to case. Some providers are more flexible and allow recipients to deviate from standard practices and even bring something new into the business system. Nevertheless, the franchisee never becomes the owner of the brand.
By purchasing a franchise, the recipient only acquires the right to use trademarks of the brand, business model, and visual identity elements. This right is often and geographically limited – the franchisee has the right to operate under the franchise brand only in the territory that is defined in agreement with the franchisor.
2. The franchisor run the franchisee’s business
Although the franchisee is not the owner of the brand, he is the owner of his business, which means he is responsible for the results of a franchise that he is managing. The franchisor, by agreement, has the right to control and supervise the work of the franchisee – procedures and business standards must be consistently applied in all franchise facilities. But, the franchisor is not involved in the day-to-day operations or management of the franchise branch.
The provider has an obligation to train and transfer all business knowledge to the recipients and their employees and must provide constant advisory and operational support to the franchisees. However, you should know that these are ancillary activities and that this does not mean that the provider owns or runs the franchisee’s business.
At the end of the day, how successful a franchise branch will be doesn’t depend on the strength of the brand. For success, it is essential that the franchisee is doing its part of the deal.
3. It is better to start a franchise with a “sound” name
When it comes to franchising, most people will first start to think about brands like McDonald’s, Pizza Hut, Burger King, or Subway. Franchising is usually associated with large global companies, which have thousands of subsidiaries around the world. Often misperception is that a “sound” and recognizable brand is a better choice than some less know franchise.
Indeed, a recognizable name and a huge base of potential customers who are already familiar with the brand can play a significant role in choosing a franchise. Yet, it cannot be said with certainty that this brings guaranteed success.
The cost of a sound-name franchise is very big. Also, it should be mention as a disadvantage that such franchise systems are less flexible, so franchisees have almost no possibility to change or adjust the business model according to their needs.
After all, all the big brands used to be small and lesser-known. So if you start the collaboration with a franchise brand that is not currently world-famous, that does not mean that you cannot achieve success. The only thing that matters is that the franchise system is proven and profitable.
Every professional and serious franchisor will present to potential recipients the financial results for at least the last two years of business. The profitability is that what will bring a smile to your face, so choose a franchise that will give you the best results, and the name of the franchise is in the second place.
4. A franchise costs a lot
The myth that all franchises are costly comes from the belief that only world-famous brands should be considered for starting the franchise. The franchises’ price ranges are very wide. It may be an exaggeration to say that anyone can buy a franchise, but the fact is that there are on the market available franchise systems that are not very expensive; therefore, anyone can find a franchise according to the available capital.
However, when estimating which franchise to choose, potential recipients should consider how much money is needed for the initial franchise fee and unit cost and how much the royalty fee is. A royalty fee must be paid every month – it ranges from 2 to 12% of the gross revenue.
However, the great advantage of franchise collaboration is that it is suitable for people who are just entering entrepreneurship. After all, training and support from providers are mandatory elements of cooperation, so even less experienced entrepreneurs can become successful managers of franchises. There is a lot of low-budget franchises that can help beginner entrepreneurs to start a sustainable business.
Of course, some franchises require previous business experience, skill, or knowledge, and such requirements are generally clearly stated in the franchise disclosure document. Among the most important criteria for choosing the right franchise are financial projections of the long-term costs that must be paid during this collaboration.
Summary
We have mention all-important advantages and disadvantages of franchising, for the franchisee but also for the franchisor. This business concept is easy to understand – two parties work on the same side, and the main goal is to make a good profit.
Franchising is not the type of business that will make you a millionaire overnight. But, you must be aware that it is easier to create success with the franchise than with a company that is started from scratch. It all depends on you and your preferences; if you are a beginner entrepreneur who has some money to invest, franchising can be a good option.