What are the pros and cons of franchising?
Startups evaluates the franchising advantages and disadvantages and whether becoming a franchisee could be right for you
The franchising industry regularly likes to remind us that being a franchisee is a safe and potentially very profitable career. While this may be true, there are also downsides.
We look at the best and worst aspects of being a franchisee:
Pros of franchising
A big name can lead to big success: Working under a well-known brand name such as McDonalds or Subway has obvious benefits for franchisees. There is increased security for your enterprise – not only are you following a tried and tested format, you can also benefit from the bigger bank balances of the larger corporations when it comes to funding for improvements.
You can also save time and energy by not worrying about generating publicity to raise the awareness of your firm – customers will know what to expect from a big chain and will often flock to a brand name.
Having an established market, proven systems and a respected business name means that the battle is already half won for you before you even start your first day of trading.
Ongoing help and support: Once you take up your franchise, your franchisor won’t simply wave you goodbye and let you run their brand into the ground without a word of advice. As well as training programmes and first-hand support, most franchisors help find and retain customers and assist with setting up accounting or stock control systems.
Most importantly, your franchisor will offer financial help in getting the business off the ground. Many help with your initial start-up costs, such as equipment or vehicles, as well as organising marketing and advertising campaigns.
The level of assistance varies according to the franchisor – some have 24-hour-a-day helplines, others have representatives on hand for quick visits to solve various problems. Either way, franchisees are not left to struggle alone.
Defined territory: The British Franchise Association (BFA) lists this as one of the main reasons that makes franchising an attractive option. Franchisors carefully choose the location of their outlets to gain the largest possible amount of custom and to avoid treading on each other’s toes.
Also, unlike starting a business from scratch, many franchisors can afford prime trading premises, such as on the high street and popular shopping centres.
Greater access to finance: If your franchisor is reluctant to part with vast amounts of cash for your start-up costs, there is no need to panic – banks will be happy to help you out.
As a franchisee, you are looked upon more favourably when it comes to bank loans and overdrafts than if you were a struggling entrepreneur trying to kick-start your own firm from scratch. The increased security and reliability of a large firm behind you means that banks will often offer you substantial loans to aid your start-up costs.
Cons of franchising
Initial and continuing fees: Franchisors will charge new franchisees a lump sum to startup a business using their brand name. Although this can be under £1,000, the amount varies greatly according to the franchisor.
Many will insist that you purchase most of the materials you need from your own pocket, and some will demand that you have a certain amount of working capital before you are even considered to be a suitable candidate.
Unfortunately, the costs don’t end there. Franchisors will take a regular slice of your takings as royalty fees. If you have a tight profit margin, the bad news is that this fee is deducted from your actual turnover, not the surplus you make.
Once your fixed-term contract is up with your franchisor, your wallet will again be needed, as you will have to pay another fee to extend the time you can trade under the company’s name. This is based on how well your firm is doing at the time.
Although these costs may compare favourably to those if you were starting up on your own, it is worth remembering that you will often have to deal with all the normal overheads that a business generates. It all adds up to a fairly large amount and you must be sure that you have the necessary capital behind you before you embark on your franchise.
You do things their way, not yours: As mentioned before, each franchisee will gain training and guidelines on how the business should be run. Although this is a helpful leg-up into running your own firm, after your franchise is established you may feel your entrepreneurial creativity is somewhat restricted.
You may get slightly frustrated if your plans for your outlet are hampered by company policy on what you can and can’t do. Franchisors generally like their outlets to look and feel the same way, so you will have to work within someone else’s idea of what is best for your firm.
As well as restricting your independence, the penalties for falling out of line with your franchisor’s wishes can be harsh. Many franchise contracts stipulate that any wild alterations to the running of your franchise can lead to the termination of your agreement.
Other people’s decisions could sink your franchise: The lack of actual control you have over your franchise means that even if you run a profitable outlet, you could still lose everything if your franchisor makes bad business decisions and the firm fails.
As well as seeming vastly unfair, news of such catastrophes can often come out of the blue if your franchisor doesn’t keep you up-to-date with developments.
Another potential source of trouble that is out of your hands are the actions of other franchisees. One bad franchise could ruin the good name of the company, dragging down your profits as well as your reputation.
You cannot escape hard work: If you take on a franchise under the impression that the franchisor will do all of the hard work for you while you sit back and watch the money roll in, you will be in for a nasty shock. Working weeks of 60 hours or more are not unheard of among franchisees attempting to get their business off the ground.
Implementing the standard working practices of your franchisor and then improving on them is a massive task and one that takes dedication and a lot of support from family and friends.