Understanding Franchises: Pros and Cons of Owning One

If you do decide buying a franchise is right for you, becoming a franchisee could offer you a faster route to the profits and entrepreneurial lifestyle you’ve been looking for.

Franchising is one way to become a business owner. It can be an alternative to founding your own business from scratch or taking over an established business. Franchises can be an attractive option since they offer an established framework, but as with anything in business, becoming a franchisee is no guarantee of success. 

While you’re buying into a proven system, you’re bound to the terms of the franchise contract. For a prospective franchisee, understanding what’s involved with franchises and weighing up the pros and cons are essential starting points. 

With this in mind, here are the main advantages and drawbacks, along with different types of franchises you can buy.

What’s involved with owning a franchise

Franchising offers a structured way to start your own business with support for everything from marketing to operations. The franchisee pays an initial fee and periodic royalties to the franchisor and in exchange receives an established business system, trademark usage, ongoing support, and the right to sell products and/or services. 

The franchisor is responsible for advertising and marketing plans, leaving the franchisees free to focus on their core business activities. The franchisee has to adhere to certain rules and standards specified in the franchise agreement. The agreement might be for a set period with the option to renew at some point.

What are the benefits of franchises?

Buying into a franchise can offer you benefits like the certainty of a proven system and ongoing marketing and training support.

• Success rate: A significant majority of small businesses fail within the first 18 months. In contrast, the best franchises tend to have higher success rates. 
• Relationships: A franchise could allow you to tap into well-established relationships with banks, suppliers, and other partners, and with the greater buying power of your network of franchisees. This could lead to cheaper supplies and services, better terms for leases, and ultimately higher profit margins.
• Proven system: By franchising, you could be buying into a proven system with equipment, suppliers, training, and operations all set out for you. 
• Established product: Buying into a franchise allows you to access an established product or service that’s been tested with consumers, without you having to do product research and development yourself. This eliminates much of the guesswork and experimentation associated with new businesses and could fast track you to profitability. 
• Brand and market presence: You could immediately reap the benefits of an established brand and market presence. This could enable you to differentiate yourself from competitors right away, reach your target market, and build a stronger relationship with loyal customers more quickly.
• Advice and assistance: The franchisor may offer mentoring, coaching, and troubleshooting answers. Franchisors might also provide franchisees with financial assistance where necessary.

What are some of the downsides of franchises?

As with any business model, owning a franchise can have its downsides. Here’s what you need to know. 

• Rules: Your franchise agreement will set out certain rules and guidelines. These can range from strict standards on product standards to store layouts and hours of operation. Usually, you’ll also be restricted to selling in a specified geographic area. For potential business owners who want to retain a good deal of control, these rules and contracts could more restrictive than expected
• Exit: Exit processes might require you to operate for a number of years before you can sell. They might mandate you give the right of first refusal to the franchisor. 
• Costs: Buying into a franchise requires the initial franchise fee and opening-inventory costs as well as ongoing payments like a percentage of royalties. On top of this, you could be paying extras like advertising and marketing fees, along with your lease, equipment costs, and working capital needs.
• Risk: If you’re buying into a less expensive and recently established franchise brand, it can come with risks relating to poor competitiveness, brand awareness, and profitability. The franchisor’s problems become your own, and reputational damage suffered by other franchisees could affect your operations. 
• Quality: Without doing sufficient due diligence, franchisees could end up with a low-quality franchise. Inadequate training, support, and marketing, along with inferior products or services could be some of the outcomes.

Types of franchises you can buy

It’s helpful to understand the three main types of franchises you can buy into so you can be aware of their implication for your role as a franchisee.

• Business format: Business format franchises are the most popular type of franchise. In exchange for the fees, you receive the rights to the franchise trademarks, trade names, processes, and systems. Franchisors tend to be heavily involved and they provide coaching and training. Examples include McDonald’s, Starbucks, and KFC.
• Product distribution: Product distribution franchises involve the franchisor providing a product and the franchisee selling the product. Typically there’s no ongoing training or support and the franchisee has more independence and fewer rules and restrictions. However, the franchisee might be required to sell the product on an exclusive basis and be subject to strict trademark terms and conditions. Coca-Cola and Ford are some of the companies that have used this model. 
• Management: In a management franchise, the franchisee manages the franchise without day-to-day operational involvement. Franchisees pay fees for trademark use, and they’re focused on business development, team management, and strategy-level concerns. 

Final considerations

Buying into a franchise differs significantly from starting up your own business and even buying a non-franchised business. You’ll likely be bound to more rules and restrictions, but at the same time, you’ll have access to excellent systems and support as long as you select a quality franchise. 

If you do decide buying a franchise is right for you, becoming a franchisee could offer you a faster route to the profits and entrepreneurial lifestyle you’ve been looking for. Purchasing a franchise is like buying any business: you should carry out due diligence – with guidance from experts like lawyers and accountants where necessary.