If you are considering franchising while starting a business, the idea can be very alluring. However, you need to consider the pros & cons of buying a franchise before you dive in. Check out the factors to consider before opening a franchise if you have the entrepreneurial streak within you.
As an entrepreneur, you might wonder whether franchising is the right option for you. So, what is a franchise business? While learning how buying a franchise works, it is a business where the franchisors or owners sell their rights and allow the franchise to use their logo, name and their business model. Some of the more popular franchise business models are McDonalds and Subway!
PROS OF BUYING A FRANCHISE
Established Customer Base
- As a franchise, you have access to an existing, loyal customer base, which is a huge benefit.
- Customers will continue coming to you even in cases of frequent ownership transitions behind the scenes.
- You get the benefits of a pre-established customer base, which can otherwise take several years to create.
While considering the pros & cons of buying a franchise, try to understand the customer base, whether the success of the venture is due to the product/service or whether it is the owner’s personal relationship with the customers.
Franchise business involves marketing support from the company, which can prove to be a great plus point for your business.
- There is no need of market testing of the product or service, as the brand has already established itself and has a market share.
- Among the pros & cons of buying a franchise, one definite advantage is that Advertising and promotional activities will already be conducted by the company or the franchisor, so you can benefit from it.
- You can normally expect a complete plan for marketing at least for the initial months. This will include promotional materials and booking of advertisements.
Note: You may have to contribute to brand funds, which will be used for marketing programs. The minimum amount you need to contribute will be mentioned in the agreement.
A franchise business normally experiences a faster growth. This is an important benefit while discussing the advantages and disadvantages of franchise ownership.
- The brand is well recognized by prospective clients and customers so this is a positive aspect while considering the pros & cons of buying a franchise.
- The company offers you investment capital for faster growth. Most startup companies fail due to a shortage of working capital.
- The franchisor is also dedicated and committed to growing your business.
- In most of the franchise opportunities, everything is set up for you and you only have to follow this system.
Opening a franchise offers a definite advantage in the form of training from the owner company.
- If you’re considering any of the franchises for sale, an important advantage is that franchisors also offer support in the form of training to franchisees.
- They help you to set up the business, offering manuals that instruct you on running the business along with regular ongoing advice.
- You do not need any other prior experience in the business, as the training given by the franchisor is enough to establish the skill necessary for operating the particular business.
- Training covers all operational aspects of the business. In most cases, they send experienced staff to assist your on site operations, proving to be an advantage while reviewing the pros & cons of buying a franchise.
Most franchise systems offer field support consultants for improving your business and maintaining the brand standards.
When you are trying to find good franchise opportunities, an important beneficial aspect is that a normal franchise agreement allows businesses the right to have access to an exclusive territory.
- In franchising a business, this means that the owner company or franchisor will not allow any other franchisee, right to establish a business or serve clients within your defined location or territory.
- You therefore get exclusive rights in this territory and peace of mind, as you need not compete with other franchisees for customers.
Support from Franchisor
Among business ideas, in a franchise business, the franchisor offers different kinds of support to a franchisee.
- Financial support is an important advantage in franchise business. It costs less to buy a franchise than starting your own business of that type.
- Also, a franchise business is usually successful, so banks are more likely to give loans to franchise businesses as compared to independent businesses. You also get national level ad campaigns that are included in the franchise fee.
Note: The amount of financial support will vary depending on the capabilities of the franchisor, its business culture, the contract or agreement and the type of franchise offered.
- If you are owning a franchise, it also offers network support. Most franchisees have regular regional meetings, conventions and so on. You can discuss your problems with them and this helps you in developing a better strategy and business plan.
- You get access to an Intranet where you can communicate with the other franchisees of the system and get valuable advice from fellow franchisees.
- You will also meet other vendors from whom you can get information, when starting a franchise.
- You get support in the form of technologies that the company uses. You get ongoing, online support, special alerts along with continuing education in the business.
- Franchisees can also benefit from grand openings to attract a huge customer base.
Brand Name Benefits: Battle Half Won
If you’re a franchisee of a popular brand name, such as Subway or McDonald’s, you will obviously derive the benefits of the brand name.
- You have the benefits of a tried and tested formula for success.
- You don’t have to generate any awareness or publicity about the company, as customers already know what to expect from a big chain and will come to you for the brand name.
Remember: You have won half the battle even before the first trading day!
CONS OF BUYING A FRANCHISE
The franchise model is a powerful one but it is not a perfect one!
In a discussion about the pros & cons of buying a franchise, one definite disadvantage is that you will need to make a significant amount of financial investment in a franchisee business, though each franchise is different.
- Franchisees typically must make an initial upfront payment or fee and another ongoing payment called the Royalty payment every month or quarterly. However, there are some low cost franchises as well.
- There will be costs related to location, furniture, equipment and other fixtures. Other expenditure includes zoning compliance’s, security, insurance, landscaping, contractor fees etc.
- You have to pay contractor fees as well as for signage, a stock up of inventory, a qualified attorney, etc, as the franchisor will not contribute towards these.
- You also need a certain amount of working capital to open the business and continue to support it till it is in full swing, say at least for a year
- There is an initial franchise fee, which covers training and support normally but might differ from company to company.
Be sure to find out exactly what you get in return for paying the franchise fee! Hire a professional franchise attorney before you sign on the dotted line.
- Your advertising tactics are important to the franchisor, so you will not have the freedom of developing or using advertising materials without getting prior approval and review from the owner company.
- A franchisee does not have any control over how to run the business, as the operational rules are defined by the agreement.
- You cannot be your own boss or control your destiny with a franchise business. You have to conform to the owner company’s rules.
- Typically, a franchisee must purchase only from company authorised suppliers in order to maintain consistency of product or service and reinforce the brand among clients. They can suggest new suppliers but this has to be approved by the franchisor and will be regularly monitored. They have to work within a specific supply network and cannot use cheaper suppliers for cutting costs.
- A franchise agreement comes with a termination clause specifying who can terminate the agreement and includes some contract obligations. Franchisees are locked or tied to a partnership.
Remember: If you are wondering about the pros & cons of buying a franchise, remember that you are investing in someone else’s ideas and system.
You May Like: 10 Mistakes to Avoid When Starting an Online Business
To Wrap Up Pros & Cons of Buying a Franchise
The economic outlook for franchises in the future is a positive one with the International Franchise Association claiming that such businesses can create jobs faster as compared to the national average from other types of businesses.
Franchise businesses offer benefits to both the parties, the seller and the buyer, but as with any other business proposition, there are some trade offs that you might have to make while making the choice.
Is franchise business right for you? The pros listed above must outweigh the cons if you want to enter such a business. Consider all the options and then decide whether a franchise is fit for you!