Franchising: the advantages and drawbacks


What are your business goals?

Many people dream of acting on their passions and starting up a business in a field they love, being free to grow it organically and make a name for themselves.

For these individuals, going it alone is the only way forward. If, on the other hand, your entrepreneurial drive comes from a desire to be your own boss, to control your own fate and to work hard to carve out a corner of the market, operating a franchise could be something to consider.

As with everything in business, franchising comes with its own set of pros and cons. 

Pros

Established brand

When you buy into a franchise, you are essentially renting goodwill that the franchisor has built up over years of successful interaction with both customers and suppliers

The usefulness of trading under a recognised name should not be underestimated. When you buy into a franchise, you are essentially renting goodwill that the franchisor has built up over years of successful interaction with both customers and suppliers.

While this means that you are bound by certain rules intended to protect its reputation, the relative lack of flexibility in business practices must be weighed against the huge trust that you gain in the eyes of the community. 

Lower risk

The fact that the business is able to offer franchising serves as proof that its model is sound. You can feel secure in the knowledge that the franchisor’s model is a successful one, that it has enabled it to grow and become profitable.

You also benefit from rules on territory. The franchisor wants you to succeed, so will attempt to purchase property in plum locations and keep you a fair distance from your nearest ‘rival’ franchise.

If you take advantage of the training and support offered, and put in the hard work required, you can be fairly sure that you’ll earn a good living - which is more than can be said for most start-ups!

Ease of securing finance

Franchising requires a significant capital investment, but it is always possible to secure funding. Different franchisors have different rules on initial investment, but most will allow at least part of your capital to be a bank loan.

Banks are far more likely to offer financing to franchisees than to start-up founders, as they are aware of the risk mitigation factors discussed above. The bottom line is that you are seen as a comparatively safe bet.

Cons

Cost

Notwithstanding the greater availability of funding, it is true that franchisees are required to inject a substantial amount of cash into their new venture. They must also pay royalties, which are typically calculated using turnover, not profit, so those operating on a slim margin may turn a loss.

Although these payments usually cover training and support, they should be thought of as the costs you are paying to hire the brand name. On top of capital requirements and royalties, you will of course need to pay staff, purchase stock and deal with all the other overheads normally generated by a business.

Lack of flexibility

As mentioned at the beginning of this post, franchising is not a good option for somebody who needs creative freedom. The franchisor is trusting you with its brand, but in return will lay down a variety of rules designed to protect its interests.

You may be forced to buy from certain suppliers, run mandatory promotions, abide by specific HR rules, and generally operate in a way that the franchisor believes will uphold the brand’s good reputation. Fail to abide by the rules and you could have your contract terminated and lose everything that you put into the business.

Hard work

This isn’t exactly a con, but it’s definitely worth mentioning. Even though you are buying into an existing business, which makes things a little easier, you cannot simply purchase a franchise and earn passive income.

You will need to be in the trenches, motivating staff, building customer loyalty and ensuring your success by building on the existing model. Don’t fool yourself into thinking that you’ll be on a 35-hour week - the real figure will probably be closer to 60. (That said, there are franchises which offer flexible and part-time working hours).

The author is planning to buy a home care franchise from CareMark

About The Author

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Thomas Jones 
Thomas Jones works for a digital marketing startup in Brighton, UK. In the future, he aims to operate a home care franchise.
 
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