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The Advantages and Disadvantages of Franchising

Running your own business is a cornerstone of the American Dream. Those with a unique business idea and the right amount of drive and capital tend to build their own company from the ground up, while others prefer to enter the business arena by buying into a well-established franchise.

A franchise is essentially opening a store while using an established brand’s name and resources to turn a profit. A fast-food chain is one such example of franchises, from McDonald’s to Burger King. Usually, the person running the business, aka the franchisee, has to pay a startup fee to the brand to run its operations normally and provide the necessary supplies.

There are two types of franchises: product and trade name, or business format. With the former, the franchisee purchases the right to the original company’s name and trademark. We are going to talk about business format, where the franchisor provides full products and services.

Advantages of Franchising

The appeal of a business format franchise is understandable. Franchising allows aspiring entrepreneurs to start a new business without incurring the same level of risk as a brand-new venture. You can switch careers easily when changing industries, which is now commonplace for most entrepreneurs. Such a benefit is great for people looking for a fresh start, and to learn from their predecessors.

The business is already established. There is very little ground for a neophyte businessperson to break. The brand, the operating traditions, and the products or services are already in place, along with brand-loyal customers. All that’s new is the location.

Key business relationships already exist. Most franchisors have existing relationships with suppliers, distributors, and marketing firms, all of which the new franchisee can benefit from while learning the ropes. They can know how many products to order and which advertising to use for new campaigns. You can also determine what is a fair price to pay for the supplies you need and how to turn a profit.

A support system is in place. There’s a lot for a new business owner to learn, and mistakes can have grave consequences. Many franchisors, to preserve the integrity of their brand, prepare franchisees for success by training them on how to properly manage sales, purchasing, advertising, and more. Everyone benefits if the new franchisee succeeds at turning a profit. Thus, they have the highest incentive.

Easier financing helps you get started. When you’re buying into a franchise, acquiring the necessary capital tends to be easier. An established brand and existing infrastructure make the venture less of a risk to investors.

You can also open the shop earlier and start raking in revenue. Franchises take less time to open than sole proprietorships do, usually requiring a year at maximum. In contrast, a sole proprietorship can take over a year to start, without a proper model in place. Time is money in various industries, and you would rather be efficient than not.

Disadvantages Of A Franchise

Setting up a franchise has its disadvantages too. Not every entrepreneur wants to be locked into a deal or surrender their creative control. They want to own their business properly and make changes as they see fit.

The franchisee has a lack of freedom and flexibility. Franchisees have little to no control over how their new business is run. The rules governing its operation are clearly outlined in the franchise agreement. This means that introducing new ideas or more efficient policies is more difficult, especially with the fine print in the contract.

Greater risk of reputational damage. If one franchise owner does something to damage the brand’s reputation, everyone else who has bought into the same business could be tarred with the same brush and lose sales as a result.

In the worst case, the franchisee may even become a scapegoat. This becomes a higher risk when you go international. McDonald’s learned this the hard way with France. They had set up several restaurants in the 1970s and removed all but two of them from the franchisee, Raymond Dayan, on the grounds that he did not meet cleanliness standards. Raymond Dayan ended up in a legal battle with the corporation over breach of contract, in part because he believed that scapegoated him. He lost the case, and it took a few more years for McDonald’s to win over French consumers.

Shared profits also mean there can be few financial benefits for the franchisee at given points in time. Franchisors expect their franchisees to remit a percentage of all profits in exchange for the privilege of representing their brand. This can pose a financial challenge during periods when sales are low.

Tied into certain partnerships. When you run a franchise, you are generally required to use the franchise supply network, which means that there is no option to work with cheaper suppliers to keep costs down. That can lead to a risk of oligopoly or having to pay higher prices if the supplier knows that they have an exclusive deal.

Like all forms of business, running a franchise has its advantages and disadvantages. Each one needs to be considered, along with your own business goals before deciding if being a franchisee is right for you.

Run A Successful Business With Help From Trembly Law

Trembly Law has all the knowledge to help you with franchising operations and other businesses. We combine industry expertise with the law to help you turn a profit and optimize your operations. You will get a successful business model with all the legal advice we can provide you.

To learn more about the pros and cons of franchising, contact Trembly Law today and schedule an appointment. We are committed to helping you maximize the assets and money you have worked so hard to accumulate, and will use our experience to help you make a business decision that is right for you.

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