Advantages and disadvantages of franchising

5 advantages and disadvantages to franchising your business

We have set our below some of the main advantages and disadvantages of franchising your business.

 

Advantages


There are 5 main advantages to franchising your business:

 

1- The Franchisee Invests the Capital

Business growth typically requires capital investment. This capital investment can be substantial, especially if business growth involves opening stores in different locations. Franchising allows business owners to expand without increasing debt or the cost of equity.

If you franchise your business, your franchisees will invest the capital needed to grow the brand. This capital may include substantial fit out costs, an initial franchise fee (paid to you) and the working capital required to establish the business.

In addition, typically the franchisee will sign the lease with the landlord, reducing one of the risks involved with operating mutiple 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. 

Franchisees will also look to innovate and improve the performance of the franchise business, often leading to an increase in innovation in the network as a whole.

However, performance requires detailed and adequate systems to be in place to guide the franchisee through the process.

 

 

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.

Franchisees will also often undertake their own local marketing, both digital and traditional. Some franchisees are permitted by the franchisor to manage local facebook pages – building rapport and brand loyalty with their local customers.

 

4 – Growth

Franchising enables you to grow your brand more quickly because you are not constrained by either financial or personal resources.

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. In addition you would need to find employees to operate and manage the locations. 

Entreprenuers generally are time poor. As set out above, a franchisee will contribute the capital and do a lot of the “heavy lifting”, such as selecting the location, overseeing the fitout 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 have more bargaining power with suppliers. Further, expansion may allow you to customise products. For example, most coffee franchises have their own particular blend of coffee. This blend may form part of the competitive advantage or USP of the brand.

Also, as the franchise network grows, you will have access to more funds to market and advertise the brand, through the advertising fund.

 

Disadvantages


There are 5 main disadvantages to franchising your business:

 

1 – 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.

It is essential that your systems and processes are clearly documented and that your franchise documents adequately support franchisee compliance.

In addition, it is essential that franchisees and their employees are well trained.

 

 

2 – Training and Continued Support of Franchisees

The development and implementation of a good training programme which will produce compliant franchisees requires time and resources.

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 continual support. Again this requires additional resources. You may need to employ specialised staff to undertake this role.

 

3 – Poorly Performing Franchisees

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.

Again, it is vitally important to have adequate systems and procedures in place to ensure compliance and to give you the ability to terminate the franchisee if it is in the best interests of the franchise network to do so.

 

4 – Compliance Costs and Risk

You need to ensure that you comply with the Competition and Consumer Act 2010 (Cth) and the Franchising Code of Conduct.

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).

In 2017 “franchisor liability” laws were introduced which included franchisor accessorial liability for serious contraventions of the Fair Work Act by franchisees.

 

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 and disadvantages to buying a franchise

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:

 

 

1 – 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.

 

2 – 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.

 

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 have the opportunity for support from other, more experienced, franchisees.

 

4 – 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.

 

5 – Negotiating Power

You have better negotiating power as a member of a recognised and proven brand.

You may also 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:

 

1 – CostsCosts and Fees 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

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.

 

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 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.

Disclaimer

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.

 

 

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