Chances are, you’ve heard of franchising. Franchising is when a large company makes an arrangement with an individual or group—allowing them to access knowledge, processes, products, and trademarks in order to sell products or services under the business’s name for a fee. Some common examples of franchises include: chain restaurants, car repair shops, and retail stores.
Having access to branding and products that are familiar to customers often comes with its advantages. However, there are some disadvantages of committing to operating a franchise business as well. If you’re thinking of opening a franchise of your own, here are some things to consider.
Common Franchise Term Definitions
Before we dive into all the ins and outs of franchises, let’s cover some of the terms and phrases associated with franchises.
- Franchisee – A business owner who purchases the right to use a franchisor’s name, branding, products, and more.
- Franchisor – The parent company that allows others to use its trademarks, products, and processes.
- Franchise Fee – The money paid by the franchisee to use the assets of the franchise. The cost is often largely determined by the size of the territory and other factors.
- Franchise Disclosure Document (FDD) – The U.S. Federal Trade Commission requires all franchisors to provide this document and update it annually.
- Startup Cost – This is the initial investment required by the franchisee. It includes the franchise fee as well as any other equipment, facilities, or supplies needed to run the business.
- Royalty Fee – Typically paid monthly to cover advertising costs.
Advantages of Franchising
Starting a franchise business holds potential to be very profitable. A lot of the groundwork that most business owners need to build from scratch is already laid out. Here are some of the main reasons why opting for a franchise over an independent small business is so appealing.
- Potentially Reduced Risk– Because franchises operate with an existing business model, there’s already a blueprint in place to show how the concept will work. It’s also easy to gauge how successful your business will be based on the performance of other franchises.
- Established Brand Recognition– Customers are typically quicker to trust things that feel familiar. It often takes new businesses a lot of time and effort to establish a strong brand presence, but one of the biggest benefits of using a franchise model is that the brand is already recognized (and trusted) by customers.
- Franchisor Support– Many materials and processes have already been developed by the franchisor and are provided to franchisees—saving them a great deal of time and planning. From staff training to daily procedures, there are many time-consuming aspects that are already in place for franchises.
- Territory Exclusivity- Most franchises include territory restrictions, so that a given market doesn’t become saturated.
Disadvantages of Franchising
As with most business decisions, there’s not always a right or wrong answer and many of the plus sides of franchises are counterbalanced by some negatives. Some of the less appealing aspects of franchising are as follows.
- Less Autonomy– While guidance and support from the franchisor is great, it also means that the franchisee needs to adhere to the restrictions outlined in their FDD. This may stifle your sense of innovation.
- Commitment to Ongoing Costs– Of course every business has annual, monthly, and weekly costs, but franchises are less flexible about how and when your money can be allocated. So even during seasons where profits may be lean, you’re still committed to the predetermined fees.
- Brand Reputation- Regardless of how meticulously you operate your franchise location, if any scandal emerges at any other franchise location, customers may associate that reputation with your business.
- The Franchisor Could Go Out of Business- No matter how successful your franchise location is, there’s always a small risk that the overall franchisor could face financial strain that could lead to your franchise being closed beyond your control.
Starting a new business is no easy feat. No matter what business model you choose, there are going to be obstacles and triumphs regardless of how cautious or organized you are. But if you’re new to business ownership or simply want to take your current business in a new direction, franchising could be a great option. You just have to weigh the pros and cons, set your priorities, and reach a decision that you feel is best for your unique situation.