The Advantages and Disadvantages of Franchising

Are you thinking of starting up a franchise business but you’re still sitting on the fence? Or you are already the proud owner of a successful enterprise and you wish to expand it by using a winning franchise model? Then, read on because, with today’s post, we’ll help you make an informative decision.

We’ll focus, first, on the advantages and disadvantages of franchising for the franchisor. And then, we’ll look, in great detail, into the benefits and drawbacks of investing in a franchising business and run it as an independent franchisee.

Pros and cons of franchising your business

Franchising is an ideal way to grow your established business. But it is always a good idea to learn about and understand the advantages and the disadvantages of choosing this path before deciding on whether franchising is the right option for your business development.

The advantages for the franchisor

A business owner can take advantage of franchising their business in terms of achieving a rapid expansion and low-risk financial gains, as well as from a management perspective.

• Fast expansion to different locations

The geographical growth of your business will be easier and quicker through building a wide and constantly expanding network of franchisees than if you had to open new outlets/branches and employ staff in different locations.

• A steady flow of financial resources

The initial payment, the franchisees invest to start up their business under your brand, as well as the royalty fees they pay you on a regular basis eliminate the need for you to borrow from banks or use your own capital to expand and develop the business.

• Business growth with a minimum risk

Again, a successful franchising model can be replicated nationwide and across borders by attracting more and more franchisees, where the responsibility of any potential failure lies more or less on the shoulders of the individual franchise owner.

• Elimination of employee-related issues

The franchisees are independent business owners who are your partners. They employ their own managers and staff, so you will not need to worry about hiring and dealing with new employees.

• Delegation of management

In relation to the above benefit, you will enjoy more free time to focus on other important business development issues as your franchisees take the management of their business into their own hands. You will not need to monitor the day-to-day running of the business.

• In the know of the market situation

You will be able to anticipate shifts in demand and other consumer-related matters through the franchisees’ regular reports and feedback. This means that you will have to invest less in your own research, in order to grow the business. After all, it is the franchisee who is in direct contact with the client, so they will provide you with great customer insight.

• Benefits, deriving from partnering with self-motivated franchisees

Your franchisees are driven and motivated to succeed. They are independent business owners who will work hard to make the enterprise profitable. This inevitably will reflect on the business as a brand. Happy and successful franchisees create a happy and successful franchisor.

• Reduced liability

If a customer suffers damages due to the negligence of the franchisee, this usually does not affect legally the franchisor (although, their reputation will certainly suffer). Just for a comparison, a company owner is directly liable for the action failings of their employees.

The disadvantages for the franchisor

The following drawbacks and risks for the franchisor should be considered carefully before making the step of franchising your business. To minimise them, smart entrepreneurs resort to the skills and expertise of legal advisors who help them draft comprehensive legal contracts that protect all parties and the business as a whole.

• Initial investment

It goes without saying that any business development venture requires initial/additional investment and crafting a franchising model is not an exception. All types of business planning, related to the outset of the franchise will need financial backing. From drafting an operational manual and other legal documents, such as the franchise agreement, developing franchise recruitment, training and support plans to investing in a marketing strategy, employing additional support and hiring legal aid – all these will inevitably cost you.

• Decreased profits

You will have to share profits with the franchisees. The franchisor receives only a small percentage of the enterprise’s revenue in the form of a royalty fee.

• Shared know-how

The secret of your business operations, the know-how, will be out in the open. This carries the future risk of third parties gaining access to your successful business model processes and use them for their own profit (a former franchisee, for instance).

• Less control

The advantage of delegating certain managerial responsibilities to your franchisees will naturally result in you having less control over key business operational processes. Also, unless you ensure that your business interests are legally well-protected by the franchise agreement, there’s always the risk of losing sight over a possible course of action that benefits only the franchisee’s business.

• The drawbacks of change

When there’s a pressing need for innovation, it is much harder to implement the changes across the entire franchise network than if you were modernising self-owned outlets, for instance. You’ll need to invest time and resources in retraining each franchisee, as well as provide them with the necessary tools to introduce those changes, improved standards or innovative practices into their individually owned enterprises.

• Damaged reputation

Having less control over how each franchise business is run and managed means that there’s a risk of having to deal with difficult franchisees who cut corners and jeopardise the business image. Your brand’s reputation may suffer over time, due to poor standards of quality and lack of proactivity by the franchisee in keeping up with their obligations.

The advantages and disadvantages of buying a franchise

It is a well-known fact that investing in an already established enterprise carries fewer risks than starting up a business as an independent company owner. But this doesn’t mean that the franchisor will serve it all on a plate for you. So, let’s explore the advantages and the disadvantages of franchising for the franchisee.

The advantages of franchising

It is appealing to become your own boss and run a business under a popular brand, right? Here’s why:

• You don’t need previous business experience

That’s right. You are not required to have business experience to own and run a franchise business. The franchisor will provide you with the necessary training so that you can get familiar with how the business operates. You will be supplied with marketing materials and offered sales and customer service support that will make things easier for you from the very start.

• You buy into a proven and successful business model

You are not required to come up with an original business idea or think of a business plan, as you will be investing in something that has been already proven to work. You’ll be presented with a business model that runs effectively on established processes. There’s no need for you to build a brand.

• Financing your franchise is often much easier than starting up a small business

You pay an initial fee, which covers different aspects in terms of the benefits you receive to operate your business. The investment fee is well-calculated and factors in various franchise business features. In contrast, starting up a business from scratch may involve unexpected costs in the period before the business is in full operation. This, of course, may put you in a difficult financial situation.

• Franchises have less chance of failing than start-up businesses

With a winning business model infrastructure in place, you will feel equipped and prepared to run your business from day one. In comparison, a small start-up business may be in for a loss from the very beginning due to, say, an overspent business set-up budget, delays, miscalculations and wrong advertising efforts.

• You instantly become recognisable via the brand name

Yes, there’s no need for you to prove how worthy you are or create a name for yourself. You represent a popular brand and your only duty is to protect its reputation.

• You get access to suppliers and existing customers

Often, the franchisor provides you with a list of reputable vendors that the business has already partnered with. So, you will enjoy a greater buying power, due to discounted prices for equipment and materials, for instance. Also, depending on the type of business, the franchisor may be able to provide you directly with job leads. So, you will save time and resources on looking for new customers, at least in the beginning.

• You are provided with ongoing support

The franchisor usually provides you with a marketing, administrative and financial support, be it related to advertising merchandise, promotional campaigns, professional certification and insurance, CRM system training or to your bookkeeping and accounting needs.

The drawbacks of franchising

The following are not so many disadvantages but limitations, which characterise how a franchising system works. And you should understand those well before buying into someone else’s business.

• You need to secure the initial investment

It is your obligation to find the financial resources to buy into a franchise business. Still, many franchisors offer flexible payment options, which may prevent you from parting with a large sum of money in one go.

• You are expected to comply with the established business standards

You enter into a legal agreement with the franchisor, which describes your responsibilities and obligations. You’ll be expected to run your business by following certain rules and standards. This means that you can’t independently make any important business decisions without consulting the franchisor, first.

• Beware of other franchisees’ misconduct

Unfortunately, franchisees from the same network may put less effort and show less care when running their business. This means that if the brand’s name suffers, the damaged reputation of the business will affect everyone involved.

Now that you know about the advantages and disadvantages of franchising from the perspective of both the franchisor and the franchisee, you can make a better and more educated decision on whether franchising is the right choice for you.

And if you’re looking for franchise business opportunities in the UK, why not consider one of our franchise packages and start your own domestic services business in an industry sector that matches your skills?

• Last update: November 17, 2020

Posted in Advice Hub, Industry Insights