5.06 – Franchising: Pros & Cons
When considering franchising, it’s essential to weigh the benefits and drawbacks to determine if it aligns with your business goals. Franchisors and franchise brokers sometimes use outdated statistics, so it’s crucial to rely on current, credible data from the franchisor itself. Here, we’ll explore the pros and cons of franchising.
The Advantages
Competitive Benefits
One of the primary advantages of franchising is the brand recognition that comes with it. Consumers expect consistency in quality and service across all locations of a branded franchise, which can attract an established customer base even before opening. This recognition allows franchisees to compete effectively against independent operators and other chains.
Brand recognition also facilitates the establishment of system-wide accounts with companies and government agencies, ensuring consistent service across all locations. This can result in beneficial contracts and pricing agreements that individual businesses might struggle to secure.
Pre-Opening Support
While the initial franchise fee might seem high, it includes numerous benefits. Franchisees gain access to tested operating systems, initial and advanced training, detailed operations manuals, marketing and advertising support, site selection tools, store design assistance, and reduced-cost equipment. This extensive support network helps new franchisees launch successfully.
Moreover, franchisees can benefit from the experiences of others in the system. Established franchisees often provide invaluable advice and insights, having faced similar challenges within the same business model.
Ongoing Support
Once the business is operational, continuous support from the franchisor’s home office and field consultants can be highly beneficial. The collective purchasing power of the franchise system can lower operating costs, while professionally designed point-of-sale systems aid in tracking sales and expenses.
Franchise systems often have access to professionally created marketing materials, advertising campaigns, and grand-opening programmes, which individual businesses might find prohibitively expensive. Additionally, the ability to share advertising costs among multiple franchisees enhances the overall marketing reach and effectiveness.
Franchise systems also continuously test and update their products and services, helping franchisees stay competitive. When a franchisor achieves critical mass in a market, the franchise system can dominate local markets through strategic development of multiple locations.
The Disadvantages
Loss of Independence
A significant disadvantage for some is the loss of independence. Franchisees must adhere to the franchisor’s rules and brand standards, limiting their ability to make independent decisions about products and services.
Overdependence on the System
Excessive reliance on the franchise system can lead to problems. Franchisees must balance the system’s restrictions with their ability to manage their businesses independently. Overdependence can hinder decision-making and local marketing efforts, ultimately affecting business performance.
Impact of Other Franchisees
The success of a franchisee can be influenced by the performance of other franchisees. Poor performance at other locations can damage the brand’s reputation, even if a specific franchisee operates flawlessly. Negative reviews or reports from other locations can impact consumer perception and, consequently, business success.
Elevated Income Expectations
Potential franchisees sometimes have unrealistic income expectations. It’s crucial to prepare accurate financial projections and have realistic expectations about earnings. Franchisors are often limited in their ability to comment on financial projections due to regulatory restrictions, so franchisees must rely on their research and the information provided in the franchisor’s disclosure document.
Franchising Inelasticity
Franchise systems are bound by legal agreements, which can limit the franchisor’s ability to make strategic decisions. Protected territories and contractual rights can prevent franchisors from seizing market opportunities or introducing new products and services without franchisee cooperation.
The Franchise Agreement
Every franchise agreement includes specific rights and obligations for both the franchisee and franchisor. These terms can sometimes be restrictive, affecting product offerings, territory size, system compliance, and additional investments required for re-imaging, remodelling, or new equipment. Additional costs for royalties, advertising, training, and other services can also impact franchisee earnings.
Many franchisors are reducing the size of territories granted to franchisees, offering exclusivity for shorter periods, or eliminating protected territories altogether. While a fully developed market benefits the franchise system, it can impact individual unit sales.
Understanding these pros and cons is crucial for making an informed decision about investing in a franchise. It’s essential to conduct thorough research, consult with advisors, and carefully review franchise agreements before committing.
