Advantages and disadvantages of franchising

We have set out below some of the main advantages and disadvantages of buying a franchise business.

Advantages

There are 5 main advantages to buying a franchise:

Brand Name Recognition

Well established franchisors provide you with an identity and a system which has proven to be effective and has a market impact:

  • you may be protected from market conditions, by the experience of the franchisor and the strength of a well established brand.
  • you may gain an established recognition from customers who identify your company or service.
  • a well established franchise offers you the ability to get customers in the door from day one with almost no extra expenditure.

Advertising

You may gain the advantage of national advertising campaigns that are included in an upfront franchise fee or an ongoing monthly fee payable to the franchisor.

The advertising fee paid by to the franchisor is usually relatively small compared with the frequency and scope of advertising campaigns conducted by the franchisor.

National advertising campaigns would be out of reach for a small business.

Support and Training

Well established franchisors will train you in everything from technology, to accounting, to standing behind the counter and taking money.

Training makes the franchise model a much less riskier venture than buying a stand alone business or starting a business from scratch:

  • franchisors are generally willing to help you to ensure the success of the franchisee.
  • you have the opportunity for support from other, more experienced, franchisees.

Marketing

A franchisor is more likely to be in touch with the market trends that trigger changes necessary to keep up with changing times:

  • a well established and proven system is more likely to be able to withstand stormy economic conditions than a newly formed business.
  • the impact of any failed efforts are greatly reduced compared to a single business owner.

Negotiating Power

  • you have better negotiating power as a member of a recognised and proven brand.
  • you have the ability to tap into the bulk purchasing power and negotiating capacity made available by the franchisor.

Disadvantages

There are 5 main disadvantages to buying a franchise:

Cost and Fees

  • Buying a franchise is not cheap, there is usually an up front franchise fee on top of the cost of the premises, equipment and inventory.
  • You need to be aware of the ongoing fees. In addition to the initial franchise fees ongoing fees are payable by you to the franchisor.
  • You also need to be aware that some franchisors will require you to refurbish franchisee stores to keep up with a changing image or theme. These possible refurbishments can cost in excess of $150,000.00.

Lack of Independence

  • The controls and limitations imposed by the franchisor can include limitations on products, pricing, employees, policies, territory, marketing, working hours and other areas deemed critically important to the success of the franchisor and the franchised business as a whole.
  • There is little freedom of scope for you to be creative; almost every aspect of operating the business will be regulated.
  • Your ability to sell or transfer the franchise business is likely to be limited. Most franchised systems have some restrictions or obligations regarding the sale or transfer of a franchised business.

Guilt by Association

  • If a franchisor or other franchisees are receiving bad press or suffering from poor public perception then you will ultimately suffer.
  • While there are many excellent franchisors in Australia, not all franchise systems are soundly based or well run.
  • You should conduct comprehensive research on the franchisor and only enter into franchise systems which have a time tested and solid reputation within the industry.

Limited Growth Potential

  • Unlike in stand alone businesses the growth potential of a franchised venture is limited.
  • Franchisors will almost always impose territorial limits on you which dictate where you can operate. There are often harsh penalties if you step over this mark.

Restrictive franchise agreements

  • Franchise agreements tend to be to the advantage of the franchisor.
  • Franchise agreements can contain heavy penalties if you breach certain clauses, including the ability for the franchisor to terminate the franchisee and to seek monetary compensation from you.

You should always seek your own legal advice before you enter into a franchise agreement no matter how reputable the franchisor is.

Contact us so that we can provide detailed advice based on our experience and expertise.

Franchise Information

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