As lucrative and exciting as starting a franchise may sound, you must always remember that this type of business venture has its own set of pros and cons.
Weighing these carefully before signing on the dotted line can mean the difference between a successful franchise partnership and a costly mistake.
In this article, we’ll cover the main advantages and disadvantages of franchising to help you make an informed decision. Read on to learn more.
Also Read: Top 15 Franchise Marketing Strategies
What Are Some Advantages of Franchising?
Franchising is an excellent way to get started in business or, if you’re a franchisor, to expand your business. There are several key advantages that make franchising an attractive option, including:
Expansion And Unit Growth
Instead of growing organically by investing more of their own money or bringing on a partner, franchising allows businesses to scale by offering franchise possibilities to franchisees.
This way, the franchisor isn’t shouldering all of the risks and can instead let franchisees invest in the company’s growth.
Franchises offer a franchisor-franchisee connection that acts as a strong legal barrier and doesn’t entail the same dangers as a joint venture or partnership.
Franchisees also tend to be more invested in the success of the franchise than an outside investor would be and are often more willing to put in the extra work required to make the franchise a success.
Fewer Costs
Franchising can help business owners lessen some of the costs involved in expanding a company, which can be a significant advantage. These costs can include advertising, research and development, and real estate expenses.
Franchising offers prospects for unit-level expansion without shouldering all of the costs that are generally associated with this type of growth.
On the other hand, organic growth requires an entrepreneur to continually invest their own money or take on partners to finance expansion, which can be risky.
Managerial Aptitude
Business owners probably know how hard it is to hire new, capable team members and supervisors as your company grows.
Franchising can help with this by offering a pre-existing organizational structure in place, which can be a boon for rapidly expanding businesses.
By giving franchisees the responsibility of hiring new managers and personnel at each franchise location, franchising helps relieve the franchisor’s burden.
Since their profitability depends on having a reliable and high-quality workforce, franchisees have an incentive to hire and train the best employees possible.
Profits
Franchises typically make more money than individually owned firms, which can be a significant advantage for entrepreneurs looking to make a good return on their investment.
Most franchises have well-known brands that draw hordes of customers, which franchisees can tap into to quickly start making a profit.
In addition, many franchises offer marketing and advertising support to their franchisees, which can help to increase profits further.
Even franchises with hefty franchise fees receive substantial returns on their original investments, often much sooner than they would if they had started their own businesses from scratch.
Less Risk
While there is always some risk involved in starting any type of business, franchising can help to reduce this by offering a proven business model and established brand.
Franchises have already gone through the process of developing and testing their products or services, so franchisees can be fairly certain that they will be successful.
In addition, since a franchisor’s reputation is on the line, they are typically very selective about who they award franchises to, which can help to further reduce the risk for franchisees.
What Are Some Disadvantages of Franchising?
Any type of business venture involves some risk, and franchising is no different.
There are a few potential disadvantages of franchising that entrepreneurs should be aware of before making the decision to franchise their business.
Initial Financial Commitment
Every new business, whether it be a franchise or an independent one, needs money to get off the ground.
However, the initial financial commitment for a franchise is often much higher than starting an independent business from scratch.
Franchisees have to pay the franchisor an initial fee, which can range from a few thousand dollars to hundreds of thousands of dollars.
In addition, they may also be required to make a substantial investment in inventory, equipment, and real estate.
That’s not to say franchisors are spared from financial commitments, either. They must also invest significant time and resources into developing their business model.
For example, franchisors have to develop a franchise program, FDD, and corporation structure in collaboration with an accomplished legal team.
Initial capital outlays might be as high as $100,000 and as low as $25,000, depending on the business.
Conflict Possibility
The network of assistance and support that franchisors offer to their franchisees can be a double-edged sword.
While it’s helpful to have someone to turn to when in doubt, any close business relationship carries the danger that the parties won’t get along.
Even if the franchisee and franchisor’s expectations are spelled out in the franchise agreement, the franchisee cannot enforce the contract without engaging in costly and time-consuming litigation.
The franchisor also has a lot of power when it comes to setting the rules for the franchise relationship.
They can change the terms of the agreement or impose new requirements on franchisees at any time, which can create tension and conflict.
Limited Financial Privacy
Financial privacy is not a huge concern for most people as long as the franchisor is not asking for personal information such as social security numbers or bank account details.
However, some franchisors do require this information as part of the application process.
The franchisor can probably control the financial ecology of the franchisee to a certain extent.
In other words, they might be able to dictate what kind of accounting software the franchisee uses or how they track inventory.
This can make it difficult for franchisees to get an accurate picture of their financial situation.
Limited Operational Control
In contrast to running a standalone business, franchisors have to give up some control when they franchise.
By defining operating territories for each franchise, establishing rules, and providing an approval procedure for franchisees’ operations, good franchising agreements and strong FDDs can help franchisors maintain more control than they would otherwise have.
It’s still necessary to weigh the tradeoffs before franchising your business since you should prepare to occasionally have to deal with non-compliant franchisees.
Marketing And Reputation Risks
The franchisor’s marketing efforts and reputation are two factors that can significantly impact a franchise’s success.
If the franchisor does a poor job of marketing the brand or if the brand gets a bad reputation, it will reflect poorly on all the franchisees, regardless of how well they’re running their businesses.
Franchisees have little to no control over the franchisor’s marketing decisions and might not even be consulted on major changes.
For example, the franchisor might decide to run a national advertising campaign that franchisees have to pay for, even if it’s not something that would benefit their businesses.
On the other hand, if the franchisor does a great job of marketing and the brand has a good reputation, it will reflect well on all the franchisees and help them attract customers.
You May Read: 14+ Innovative Franchise Marketing Ideas
Bottom Line
Franchising can be a great way to expand your business, but it’s not without its drawbacks. Before you decide to franchise your business, make sure you understand the risks and advantages.
Amit Gupta is the founder of DrFranchises – a digital marketing agency that helps brands rank better on Google Maps through local SEO strategies. Amit has over 11 years of experience in digital marketing, SEO, email marketing, and social media marketing. He’s also the owner of multiple franchises and has helped countless brands achieve success online. When he’s not working, Amit can be found playing with his dog.