Q: What are the pros and cons of franchising?
May 19 2006
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The franchise model has some huge benefits for you and your franchisor, but also some notable and important differences to setting up your own that some people might consider drawbacks.
The advantages for a franchisor are wide-ranging, including that they can expand the business brand across many more territories with most of investment coming from franchisees. Another advantage is that a franchisee tends to be more committed to making the business work (since their own money is invested) than a management employee who ideally wants to work key hours, say 9-5.
The disadvantages are that the brand can be damaged by a rogue franchisee, it may take a number of years to become established and growth is determined by the ability to find suitable franchisees and, where applicable, premises.
For a franchisee, the best thing about franchising is that they are buying in to a proven, tried-and-tested system. It's much less risky than setting up a brand new venture from scratch while going through the trials and tribulations necessary to find out if the business model will even work. On the other hand, you will have to follow a laid-down system, which may curtail any entrepreneurial spirit. It means you are contractually restricted in how much you can innovate and any major new ideas will need approval, and may take time to be implemented across the network.
The most significant issue to consider as a potential drawback for a franchisee is that, unlike with starting up your own business brand, you will have to share your financial success with your franchisor. If your franchisor charges you an ongoing fee as a fixed percentage of your revenues every month or year, the more money you make the more you will have to pay in fees. That's the price you pay for using the franchisor's system and the contribution you make to cover the administration costs incurred by your franchisor as your business grows. It's up to you to decide if it's worth paying the extra fees in order to pocket extra money yourself. What this arrangement does ensure is that your franchisor has an interest in the ongoing success of your business.
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