Franchising your business or buying a franchise can be a major decision for any entrepreneur. It is important to carefully consider the advantages and disadvantages of both options before making a choice.
In this article, we will look at 5 key advantages of franchising your business or buying a franchise and 5 key disadvantages of franchising your business or buying a franchise.
5 Advantages of Franchising your business
Franchising offers a way for an entrepreneur to grow their business while sharing risk. There are many advantages of franchising your business, we have set out 5 of the key advantages below.
1- The Franchisee Invests the Capital
Franchising allows you to grow your brand without increasing debt or the cost of equity. Your franchisees will invest the necessary capital, including fit-out costs, an initial franchise fee (paid to you), and working capital, to establish each franchise outlet. This can be particularly beneficial if you plan to expand your business by opening stores in different locations.
In addition, the franchisee may also enter into a lease with the landlord, reducing one of the risks involved with operating multiple sites.
2 – The Franchisee has a stake in the success of the Franchise Business
Unlike in an employment relationship, a franchisee has a financial stake in the business. It is in the franchisee’s interests to maximise the profitability of the individual franchise business.
Franchisees will generally outperform managers, both in generating turnover and in keeping an eye on expenses. For example, labour costs are generally better managed by a franchisee, as they are usually more careful with wages and scheduling.
3 – The Franchisee is responsible for the day to day operation of the franchise
A franchisee will often work in the franchise business and is responsible for employing and training staff.
If you are not responsible for the day to day operations of the franchise business, this will allow you to focus more on the big picture, including innovation and brand management.
If your business goal is to open 10 locations in the next 12 months, each costing $300,000.00, you would need to find $3,000,000.00 plus working capital to grow the business without franchising or licensing. In addition you would need to find employees to operate and manage the locations.
In addition to contributing the capital, franchisees do a lot of the “heavy lifting”, such as selecting the location, overseeing the fit-out and managing the day to day operations, including local area marketing.
Growth often builds on itself. As brand presence increases, the pool of prospective franchisees also increases.
5 – Greater Buying Power
As the franchise network grows, you will not only have an increased customer base but also more bargaining power with suppliers. This means that you can negotiate better deals and discounts, resulting in cost savings for both you and your franchisees. With a larger network, suppliers are more likely to prioritise your business, giving you access to higher quality products or exclusive offers.
In addition to increased bargaining power, expansion also allows you to customise your products or services to better meet the needs and preferences of your customers. For example, if you own a coffee franchise, as your network grows, you can work closely with suppliers to develop your own unique blend of coffee. This customised blend can become a distinguishing factor and a competitive advantage for your brand, attracting coffee enthusiasts and loyal customers.
5 Disadvantages of franchising your business
While there are numerous advantages to franchising your business, it is important to consider the disadvantages as well. Here are 5 key disadvantages of franchising your business.
1 – Loss of Control
A major disadvantage to franchising your business is the loss of control. The flip side to the franchisee being responsible for the day to day operation of the franchise business is that you do not have control of the day to day operation of the franchise business.
In order to maintain consistency in the quality of your product or service, it is essential that your systems and processes are clearly documented and that your franchise documents adequately support franchisee compliance.
In addition to systems and processes, adequate training for franchisees and their employees will also assist to maintain consistency and quality across the franchise network.
Our blog Disadvantages of Franchising - Loss of Control explores the topic of loss of control in more detail.
2 – Training and Continued Support of Franchisees
Another disadvantage of franchising your business is the resources required for training and continued support of franchisees. Developing and implementing a comprehensive training program for franchisees requires time and resources, as does the provision of ongoing support.
A common complaint made by franchisees is that their initial training was very basic and that they commenced operating the franchise business without really knowing what to do.
Franchisees also require ongoing support, which is crucial for their success and the overall growth of the franchise network. This support may include various aspects such as marketing assistance, operational guidance, and continuous communication.
To provide effective ongoing support to franchisees, you may need to allocate additional resources and employ specialised staff.
Perhaps one of the greatest challenges for a franchisor is managing poorly performing franchisees.
Often a franchisee is “locked in” to their franchise, due to financial investment and may be forced to continue to operate the franchise business when they are no longer motivated to do so.
If a franchisee is not performing and is unhappy, they can be difficult to move on and they can damage your brand.
Our blog The Challenges of Poorly Performing Franchisees explores this topic in more detail.
Franchising in Australia is heavily regulated. You need to ensure that you comply with the Franchising Code of Conduct and the Australian Consumer Law. In addition, you need to ensure that franchisees are complying with relevant laws such as the Privacy Act 1988 (Cth) and the Fair Work Act 2009 (Cth) (the Fair Work Act).
A - Complying with the Franchising Code of Conduct
The Franchising Code of Conduct (the Franchising Code) is a set of regulations that governs the relationship between franchisors and franchisees in Australia [What is the Franchising Code of Conduct?]. Franchisors can face heavy penalties if they do not comply with the provisions of the Franchising Code.
Under the Franchising Code, franchisors are required to:
i) act in good faith [What is good faith in franchising?];
ii) provide disclosure of relevant information to potential franchisees;
iii) update their disclosure document annually [What is a disclosure document?];
iv) comply with marketing fund requirements (including annual requirements) [Franchise Marketing Fund Requirements];
v) comply with dispute resolution processes;
vi) register a Franchisor Profile on the Franchise Disclosure Register [The Franchise Disclosure Register];
vii) comply with regulations in relation to franchise agreements.
B - Complying with the Australian Consumer Law
In addition to the Franchising Code, franchisors also need to comply with the Australian Consumer Law (the ACL). The ACL deals with franchising issues such as:
- Misleading or Deceptive Conduct [What is Misleading or Deceptive Conduct?],
- Unconscionable Conduct [What is Unconscionable Conduct?], and
- Unfair Contract Terms [Unfair Contract Terms].
C - The Fair Work Act
The Fair Work Act sets out the minimum employment standards for all Australian workers, including those employed by franchisors and franchisees. It covers areas such as wages, working hours, leave entitlements, and workplace health and safety.
In 2017 “franchisor liability” laws were introduced which included franchisor accessorial liability for serious contraventions of the Fair Work Act by franchisees.
Our blog Franchisor Liability and The Fair Work Act considers this issue in more detail.
5 – Managing Growth
The flip side to “fast growth” is ensuring that your new business as a “franchisor” has the resources required to adequately manage the franchise network.
The business of franchising and being a franchisor is different from operating the business that you have franchised. You will need to ensure that you have the staff and the systems that can support an expanding franchise network.
5 Advantages of buying a franchise
There are numerous advantages of buying a franchise. Here are 5 key advantages of buying a franchise :
1 – Brand Name Recognition
The main advantage of buying a franchise is 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. This brand recognition not only helps you stand out in a competitive market but also provides a sense of security. By aligning yourself with a well-known brand, you may be protected from market conditions, thanks to the experience of the franchisor and the strength of the established brand.
Furthermore, buying a franchise gives you the opportunity to benefit from the established recognition that customers have for the brand. Customers who are familiar with the brand are more likely to trust and choose your company or service, giving you a head start in attracting customers and generating revenue. This built-in customer base can significantly reduce the time and effort required to establish your business and start making profits.
2 – Advertising
In addition to the other advantages of buying a franchise, one major benefit is the opportunity to take advantage of national advertising campaigns. These campaigns may be included in the upfront franchise fee or an ongoing monthly fee that you pay to the franchisor.
National advertising campaigns can have a significant impact on your business. They help to raise brand awareness and attract customers on a larger scale. The frequency and scope of these campaigns are often beyond what a small business would be able to afford on its own. By participating in these campaigns, you can tap into a wider customer base and gain exposure that would otherwise be difficult to achieve.
Furthermore, national advertising campaigns help to establish and strengthen the brand identity of the franchise. Customers are more likely to trust and choose a brand that they are familiar with. By participating in these campaigns, you can build on the existing recognition that customers have for the brand, giving you a competitive edge in the market. This built-in customer base can greatly accelerate the growth of your business and contribute to its overall success.
3 – 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 also have the opportunity for support from other, more experienced, franchisees.
4 – Marketing
With a well-established and proven system, franchises are more likely to withstand stormy economic conditions compared to newly formed businesses. This is because the franchisor may have already navigated various economic cycles and may have the experience to make necessary adjustments.
Furthermore, a franchise's ability to adapt to market trends is crucial in maintaining its competitive edge. With a strong brand and established customer base, a franchisor may be able to respond to changing consumer preferences and implement new strategies to meet their needs. This agility is especially valuable in industries where trends and technologies evolve rapidly, such as the food and technology sectors.
You can also learn from the experiences of other franchise owners and tap into the knowledge and resources of the franchisor to minimise risks.
5 – Negotiating Power
As a member of a recognised and proven brand, buying a franchise may provide you with better negotiating power. This advantage stems from the fact that franchisors have already established relationships with suppliers and have a track record of successful business dealings.
By tapping into the resources and network of the franchisor, you may be able to benefit from economies of scale when it comes to purchasing inventory, equipment, and supplies. Additionally, being part of a larger franchise network gives you access to preferred suppliers and exclusive deals that may not be available to independent businesses.
5 Disadvantages of buying a franchise
While there are numerous advantages of buying a franchise, there are also disadvantages to buying a franchise. Here are 5 key disadvantages.
1 - Costs 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.
2 – 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.
3 – 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.
4 – Limited Growth Potential
One of the disadvantages of buying a franchise is that the growth potential of the venture is often limited compared to stand-alone businesses. Franchisors typically impose territorial limits on franchisees, which dictate where they can operate. These limits are put in place to protect the brand and prevent franchisees from encroaching on each other's territories. However, this can restrict the expansion opportunities for franchisees who may want to explore new markets or expand their operations beyond the designated area.
In addition, franchise agreements only allow you to operate the franchise business for a specified term. While you may be able to renew the franchise agreement at the end of the term, you may not necessarily be offered a renewal and there may be reasons why you are not able to renew. There are usually further fees and costs which are required to be paid to the franchisor on renewal.
5 – 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 franchise agreement 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.
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.