Pros and Cons of Buying a Franchise
There are obvious advantages in buying a franchise, the most important being that you will be purchasing a tried and tested business concept. It may not be cheaper than starting your own business in the same sort of market but it does bring with it a recognised brand image. It is estimated that whilst only one in five new-start businesses will still be trading after five years, some 90% of franchise operations will have succeeded.
The Benefits
There are numerous benefits in buying a franchise some of which are:
- You will have the opportunity to purchase a business concept that has already been tried and tested in the market.
- The risks of setting up a franchised business are substantially reduced when compared to establishing a new business in the same market.
- A franchise will provide a brand image that the public will recognise.
- Business premises will all comply with an established interior and exterior design to assist with brand promotion.
- Specifications for the equipment required by the franchise will be clearly identified from the outset.
- Publicity and ongoing marketing can be arranged by the franchisor as part of the contractual agreement.
- Comprehensive training in all aspects of running the business will be given to you by the franchisor, both initially and on an ongoing basis as methods are improved.
- The 'operations manual' received as part of the franchise will give standardised procedures for accounting, sales, and stock control.
- The franchisor may be able to provide you with better terms for the centralised bulk purchase of raw materials or goods used by the franchise.
- As the franchisee, you should benefit from the franchisor's ongoing research and development undertaken to improve the franchised product or service.
- Networking with other franchisees will provide both you and the franchisor with opportunities for review and improvement of the operating procedures.
- The franchise should have a clearly defined geographical area within which the rights of the franchise are protected from other franchises from the same franchisor.
The final advantage of purchasing a franchise, as opposed to starting your own business, relates to raising funding for the venture. Gaining finance to purchase a franchise is generally easier than gaining finance to start a new business. The reason for this is that the franchisor will be better able to provide estimates of the likely sales and costs, thereby giving a more accurate prediction of profit levels.
The Disadvantages
As with all business ventures there are some disadvantages to buying a franchise. Being a franchisee means that you are buying a total business concept and there is subsequently no room for individuality in terms of the product or service offered. The franchisor will demand that all aspects of the business are operated exactly as set out in the 'operations manual' with uniform standards for appearance and packaging of the goods or services.
Many prospective franchisees feel that they can improve on the way that things are done. That may well be the case but, unless the franchisor agrees, you will be forced to conduct your business exactly as they tell you.
Once a franchise has been purchased it can be difficult to dispose of as there are often limitations placed on any re-sale. The franchisor will, more than likely, want to approve the potential purchaser, and they will probably want some control over the sale price.
It can also be extremely difficult to enforce exclusive territory rights. When you purchase a franchise, the franchisor will usually undertake not to sell another franchise within a defined geographical area.
Disputes over the royalty fee or management charge that is usually based on sales turnover or profits are not uncommon. As part of the contractual agreement the franchisor will normally undertake centralized marketing campaigns, for if these are not undertaken it will undoubtedly have an impact on sales. By the same token, it could be that the franchisor undertakes marketing campaigns that have little benefit for a particular franchisee in, say, a remote location.
