A Guide to Pros and Cons of Franchises

Pros and Cons of Franchises

Published on: 2009-10-23

Buying a franchise is one of the easiest ways of  getting into business and becoming your own boss. That’s why hundreds of people  take the plunge every year and part with their hard earned cash in the hope of  even greater riches. You will however need to accept that buying a franchise  means you’ll lose some independence and control of your business. Take a look  at the pros and cons of buying a franchise before deciding if it’s right for  you:

Pros:
  1. As many as 95% of new businesses will fail within their first 5 years. Franchises however enjoy a 90% success rate (Natwest / British  Franchise Association Annual Survey) over the same period. Franchises use tried  and tested methods of doing business. They’ve made the mistakes for you and  learned the lessons a long time ago. The successful business model that you buy  into is what helps you to avoid disaster in your first few years of business.
  2. Most franchises already have an established brand in place. If you  started your own business, you’d need to establish a brand from scratch and it  would take you years gain the same level of brand recognition for your products  or services. With a franchise you have brand recognition from day 1.
  3. As part of your franchise fee, the franchisor normally handles all marketing  for you. The result is that your franchisor ends up with a much bigger  budget to attract and retain customers. This means that you can get on with your business, without  having to learn how to be a marketing genius.
  4. Buying a franchise also means you benefit from the franchisors experience,  market knowledge and business acumen. When you buy a franchise you’re going  to receive training from the franchisor. That training and any ongoing training  will have been formulated using the franchisors market knowledge and expertise  in the industry.
  5. Franchisors can also assist you in finding a suitable location for you new  franchise. Franchisors can work with you to find the best location for your new  business and also help you to avoid infringing on another franchisees  territory.
Cons
  1. Some  franchisors require you to have experience in their  industry or business experience of some kind to be able to operate one of their  franchises. You might find that a franchise opportunity in the sector that interests  you requires some level of previous experience.
  2. Many franchisors require you to have a minimum amount of working capital available before they’ll consider selling a franchise to you. This means that  once you’ve paid your initial licensing fee you’ll need to have a certain  amount of liquid cash available for the day to day operations of the business.
  3. Franchise fees need to be paid to the  franchisor. Once the initial franchise fee has been paid, you’ll normally need  to pay an ongoing monthly fee for administration and marketing. Some franchises  are for a fixed term, and you’ll need to pay the initial franchise fee again if  you want to renew your franchise agreement once it expires.
  4. Franchise fees are normally charged as a  percentage of revenue rather than profit. This means that even if your business  is not making a profit, you’ll still need to pay monthly franchise fees to the  franchisor.
  5. When buying a franchise, you need to  accept that you’ll have less freedom and control than people who started their  own business from scratch. There are already established systems in place that  need to be adhered to as part of your franchise agreement. Some franchises  require a more regimented approach than others and you may find that products  or services must be sold and displayed in a certain way to comply with your  franchise agreement and to reinforce the existing brand.
  6. The franchise agreement that you sign  when buying a franchise stipulates what the penalties are for violating the  conditions set out in the franchise agreement. In some instances, the penalty  for violating the terms of your agree could be as harsh as cancelling your  franchise agreement, which could leave you seriously out of pocket.
  7. There is also the danger of your  competitors undercutting you. If the franchisor fails to react quick enough,  you might find yourself making a serious loss and with little room to  manoeuvre.
Ultimately  you need to decide if the pros outweigh the cons of buying a franchise. Some  individuals are happy to forego the freedom of being an entrepreneur in  exchange for the stability of a franchise. If you can live with the drawbacks  of buying a franchise and find the benefits exciting, then franchising is  something you should seriously consider.

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