Advantages and Disadvantages of Franchising
Deciding to buy a franchise is a big decision that needs to be meticulously planned out by the individual(s) making the purchase. The world of franchising is not an easy environment for everyone to thrive in. If you are wondering why you should start a franchise, weighing the advantages and disadvantages is a solid place to start.
Franchising is a career path that features many hills and valleys, which is why we have created this piece as an introduction to franchising, and by the end, hopefully, paint a clear picture of whether or not this is the right move for you.
What is Franchising?
Franchising is the process of an established brand (franchise) like Jimmy John's (or a much smaller business) leasing out its trademark or trade name and a business system to someone (franchisee). The franchisee pays an initial fee and ongoing royalties to the franchisor for the right to do business under their name and system.
What are the Disadvantages of Franchising?
To save the best for last, we will start by getting the negatives out of the way. It should be said that these disadvantages are not here to dissuade someone from entering the franchising industry, but to make sure that they are aware of some potential pitfalls.
- Limited Creative Vision: It is quite common for people that are interested in starting their own business to invest in franchising because they don't need to spend the time or money building a brand. However, franchising is not like running your own business. There will be set operational standards that you must adhere to that, if you breach, may result in termination of the contract. While you are running that specific location, all other brand and product decisions are made by the franchisor. If you are genuinely passionate about running your own business and implementing your ideas, franchising may not be the best fit.
- Beholden to the Brand's Reputation: One reason to franchise a global brand is due to its popularity and reputation, which is great for the most part. However, if the brand's image is damaged in any way and public perception decreases, then the franchisees will likely take the brunt of the effects. It is impossible to control scandals or financial mistakes made by the franchisor. This should be something to consider before partnering with a more prominent brand. An easy example to pull from are the events surrounding Subway’s old spokesperson. All individual franchise owners were impacted by this event, even though they had zero involvement. However, with bigger organizations, like subway, your business may weather the storm and continue to operate into the future. This is just another factor to consider when you are looking at businesses to franchise.
- Contract Duration: Even if a franchisee is successful with their venture, there may come a time when they want to part ways and move away from the franchise. However, this may be hard to do if the franchisee wants out before the date agreed upon in the contract. The franchisee may be able to sell the business early, but cannot sell the business without the approval of the franchisor/the parent company. It should also be noted that in rare cases, the franchisor may decide not to renew the contract, even if the franchisee would like it and has been successful. These all are things to consider before entering into an agreement with a franchisor. The right partnership will be beneficial to both parties.
- Costs & Fees: In most cases, franchising is not a cheap investment, and the initial fee can range from tens to hundreds of thousands of dollars. As we mentioned earlier, there may also be royalty fees (it's rare, but not all franchises have royalty fees) that you must pay to the franchisor or parent company as long as you are in operation. If you are looking for profitable franchises with a relatively low cost of entry, we recommend looking at our database of low-cost franchises.
- Limited Growth: With your own business, you have the freedom to expand wherever possible, whether that be enlarging a current location or venturing into a new city. While the franchisor will encourage growth, there are territorial limitations to keep one franchisee from competing with another franchisee in the same system.
The best way to avoid these pitfalls is by doing the proper research through an organization like ours, Franchise.com. Then, if and when you land on a franchise you want to buy, ensure that the contract is clear on the responsibilities of both parties.
What Are the Legal Issues in Franchising?
The five disadvantages listed above are quite common, and most individuals will consider some or all of them before joining the franchise industry. The legal side, however, does not get the attention it should, especially for those new to franchising. Here are some legal issues that anyone should consider before franchising.
- Franchise Disclosure Document Discrepancies (FDD): This is a legal disclosure document that must be given to individuals interested in buying a franchise as part of the standard pre-sale process. In most cases, franchisees will use the disclosure document to inform critical decisions around the business. The FDD will be written by the Franchisor and their legal team. It would be wise to hire an experienced attorney to review the document to ensure your protection.
- Consumer Protection Act: The Consumer Protection Act "safeguards purchasers of goods and services against defective products and deceptive, fraudulent business practices." This helps ensure the safety of the individual making the purchase of the franchise. Evaluating the risks of investing in a franchise can be complex, and the potential franchisee will often have to rely on the franchisor to communicate the nuanced details of their agreement.
- Local, State, and Federal Laws: Anyone entering a franchise agreement needs to be aware that there can be different laws around the same topic at the local, state, and federal levels. This is another reason why hiring a lawyer experienced in franchise law helps ensure everything is above board.
What Are the Advantages of Franchising?
It is finally time to start talking about the benefits of franchising and why we think it can be such a profitable move for the right individual.
- Business and Operational Assistance: While it would be advantageous to have industry experience before franchising in that industry, the franchisor is there to help. They will provide you with adequate training to run the business with their current strategy. It is important to note that the exact amount of assistance that will be given to a franchisee should be laid out in the franchise agreement.
- Less Chance of Failure: This is not a guarantee, but compared to starting a business from scratch, operating a franchise with multiple locations already thriving means there is a higher chance you will too.
- Built-in Customer Base: We have mentioned the importance of the franchisor's brand, but it truly is a powerful tool. Franchising with an established brand means that if you are in a town of 500 or 50,000 people, you will be able to generate business rather quickly compared to a fresh start-up. This also cuts down on the marketing efforts in the early stages of operation.
- Increased Buying Power: Inventory and other items that need to be purchased on a daily, monthly, or yearly basis will add up quickly, especially for an entrepreneur. A franchisee, however, will benefit from the parent company's immense buying power. This usually results in deals on large bulk purchases that other businesses cannot secure.
- Be Your Own Boss: While you will not have the total freedom and power of running your own business, in most cases, the franchisor will have a hands-off approach to managing your operation. As long as things are running smoothly and a profit is being made, you can employ a unique management style and truly make the location your own (within reason).
One of the keys for any franchise partnership to be successful is if both parties are the right fit. The contract and work have to make sense for the franchisor and franchisee before anyone will see a positive return on investment. To get started on the right path, head over to our franchise opportunities page to browse available franchises by state and initial investment amount.
Importance of Franchising in the Economy
When a company thinks about franchising their business or an individual decides they want to become a franchisee, it is easy to think about the immediate impact on their own respective situations, but this industry has a more considerable influence on society than most may realize.
When an organization decides to franchise their business, they are not just creating a job for a potential franchisee, but possibly hundreds of jobs for the employees working at each location. Regardless of how you look at it, creating new jobs in any city is beneficial as it will contribute to the national GDP and create a healthy level of competition in the economy. At the local level, the taxes the franchisees have to pay will benefit the communities by supporting schools, public parks, and other community needs.
Examples of Franchises
There are many different types of franchising opportunities available today, and with such a significant investment required out of the franchisee, we want to make sure you have the right information available. Here are three franchises that we currently have listed that vary in brand size, initial cost, and other benefits.
- Critter Control: Critter Control is America's largest wildlife nuisance company focused on the most humane removal methods and thorough exclusion work. The required minimum liquid capital is $6,000 to get started. Critter Control provides extensive, state-of-the-art training and support as well as advertising & promotional materials.
- ClaimTek Systems: ClaimTek is the only company that enables you to work with any Medical or Dental specialty to maximize your chances for success in the billing business. Starting at an initial investment of $20,000, they will provide you with business development, marketing, branding, inventive software solutions, training/consulting, and a unique support system to ensure success.
- World Gym: World Gym is an iconic, globally-recognized brand in the resurging health and wellness category. They are on the higher end of franchises to own, as you will need to have a minimum liquid capital of $200,000 and a net worth of $1,000,000. At this price point, you will receive world-class equipment brands and a team of certified and experienced trainers as your staff.
Franchise.com:The Best Marketplace for Franchises of all Kinds
The journey of owning your own franchise is an exciting one, but the first steps can often be the most difficult. That is why we designed our innovative website to unite the franchise community by serving as both a unique search tool for finding the right business for sale and a franchise industry resource.