Franchising may be of interest to an entrepreneurial-minded person who does not want to take the risk of starting up a new business from scratch or buy an existing business. Owning a franchise is when a person pays an initial fee (and ongoing royalties) to purchase the rights to use a company’s trademark, ongoing support from the franchisor and most importantly, the right to use the franchisor’s system of doing business—which includes the sale of its products or services.
The following is a list of various pros and cons of opening a franchise business, as compiled by the start-up experts at Entrepreneur.com.
Corporate/Brand Image: When a business owner decides to invest in a franchise, s/he gains the advantage of the brand name that is associated with the same. Consumers are well aware of the brand and are comfortable with making their purchase due to the familiarity. This also reduces costs of creating and advertising a completely new brand in the marketplace. For example, buying a Starbucks franchise would result into a direct association with trust and renowned coffee.
Established Systems: One of the biggest advantages of franchising is the support that the franchisee receives from the franchisor. As the company is well established, it allows the franchisee to mimic the day-to-day operating activities, which includes inventory control, recruiting processes, and accounting systems. This eliminates the trial and error method and therefore, results in lower costs.
Time Management: When purchasing a franchise, entrepreneurs can focus on other aspects of the venture rather than developing the business model. This can help to save time and allows the owner to focus on aspects such as marketing, promotions and providing excellent customer service.
One of the greatest benefits of opening a franchise is established brand recognition, along with a tried and true operations system for running the business. Some franchisees that have great success opening a branch in their location choose to open one or more multiple branches, ultimately leading to more responsibilities and, in successful cases, additional revenue.
Lack of Flexibility: Due to the already-established operating system, some franchisor refuses to provide flexibility to a franchisee. Because there is a set of rules and operating procedures in place, they must be followed accordingly, which can cause conflicts between the two parties in relation to the degree of control in the business.
Cost of Advertisement: There is usually a set fee for advertising, either on a national or regional level (and most franchisors require a certain amount to be contributed from each franchise). However, many franchises receive high-visibility benefits during a national campaign, which can be beneficial for a franchise’s bottom line.
Royalties: Apart from the initial start up cost, franchisee owners have to pay certain percentage of their revenue to the franchisor every month or year, regardless of the profitability of the business. Specific royalty fees will be determined within the franchise contract. These royalties are normally charged due to the support provided by the franchisor.
Are you a franchise owner? What factors went into your decision to purchase a franchise? Please feel free to share some pros/cons that you came across in the purchase process!
To read more about the in’s and out’s of franchising, you may visit http://www.entrepreneur.com/article/36328#.
Thanks for reading, and until next time… stay WISE!