5 pros and cons of franchising
You've got an entrepreneurial streak and are keen to get into your own business. So should you go it alone or buy a franchise?
There are distinct advantages and disadvantages to each model. However many franchisors will tell you that with a franchise opportunity there is more likelihood of success.
While success in business is inherently reliant on the operator, market conditions and a number of external factors, a proper due diligence process and thorough research allows first-time business owners to greatly reduce their risk of failure, and this is especially true in franchising.
If you are considering starting a business and are wary about going into it alone, here’s five pros and cons of joining an established brand with a set operational structure.
Why a franchise can work for you
1. Unlike stand-alone operations, franchisees benefit from ongoing support across a number of key areas. Your franchisor and indeed the wider franchise network can provide advice and information regarding all sorts of operational concerns.
2. Joining a franchise brand allows new business owners to leverage the reputation and brand image to generate sales from day one. In a start-up setting, the initial few weeks can be slow, eating away at your capital, however existing brand loyalty and a franchise with positive consumer sentiment will increase your chances at profitability through this difficult stage.
3. Structures will already be set. There are two reasons why franchisors opt to do things in a certain way; Corina Vucic, director of FC Business Solutions explains the first.
“One of the key reasons customers love franchises is consistency – they know they can get the same product regardless of whether they walk into an outlet in Brisbane or Hobart.”
Consistency allows franchisors to develop a cohesive network, which in turn generates consumer loyalty, something that is highly beneficial to the franchisee network.
The second reason is efficiency. Franchisors invest a lot of time and money into establishing the most efficient and profitable method of operation, from developing relationships with suppliers to integrating new market innovations, franchisees should trust that the franchisor has their foot on the gas pedal.
4. It may be easier for a franchisee to secure financing for their business, rather than attempt to persuade lenders to provide funding for an independent venture.
Having the backing of an established brand with longevity and a history of profitable outcomes will allows prospective franchisees to strengthen their case for financing.
5. Franchising can allow someone with no industry knowledge to excel in a new industry.
Franchising is regularly associated with big name fast-food chains and fitness powerhouses, however some of the most profitable franchise businesses are found in the business services and finance sectors.
Brands like Aussie provide comprehensive training and industry accredited programs that enable new business owners to start their own mortgage broking business with no experience.
The brand provides new franchisees with a bespoke five-week Certificate IV in Finance and Mortgage Broking program, providing industry-specific education and business operational training.
In many franchise models, no experience is necessary, opening opportunties for new business owners to enter industries outside their previous working history.
Why a franchise might not be right for you
1. Franchise agreements are wholly inclusive documents that govern a strict operational code.
Franchisees must be committed to following the obligations set out in the agreement in order to ensure entire network consistency and contribute to building brand value.
If you are someone who likes to do things their own way, franchising may not be for you.
2. Some franchisors may dictate where stock and products come from. While this is generally an effort by the franchisor to simplify supply chain practices and ensure brand consistency, some franchisees may believe that they could find similar quality products elsewhere for cheaper.
Supply chain requirements should be outlined in your franchise agreement, so be sure to confirm how strict those requirements are.
3. There are ongoing fees associated with operating a franchise business. This could come in the form on a flat fee or as a percentage of the franchisee’s profits.
While these fees are exclusive to franchising, they are often viewed as payment for the privilege of using an established brand’s intellectual property, such a brand name, marketing material and reputation.
4. If a franchisee wishes to leave a business prior to the agreed upon term, there will likely be termination clauses that result in financial penalties.
This is to ensure the financial protection of the franchisor. Regardless of the situation, franchisors must be able to trust that their brand will not be damaged as a result of early-exit.
5. While a rare occurrence, should the franchisor go out of business, the franchisee would be at risk. This ultimately comes down to comprehensive due diligence and a regular assessment of the franchise model.
Consult with franchise specific accountants and lawyers as to your options should this occur in the future, and be sure to study the disclosure document intently. Here, you will find a broad range of information relating to the franchisor’s financial and business background which, with thorough research, could help you to chart the direction of the business.
Franchising is a business model that promotes itself as a simplified entrance to business-ownership, however it is not entirely without risk.
All business opportunities will have some element of financial danger, however extensive research and a commitment to proper due diligence enables prospective franchisees to make an informed decision.
Lifestyle factors and your own personality traits are also big factors that contribute to your potential for success within the sector.
It is a highly regulated industry that works best when franchisees adhere to the strict guidelines put forward by the franchisor.
If you aren’t willing to follow the wishes, processes and structures supplied by the franchisor, the model isn’t for you.
If you are however, a comprehensive due diligence process, thorough research and a trip to a franchise specific accountant and lawyer will help make the transition to business owner a happy and profitable exercise.
Is franchising the right fit for you?
Why not check out some of the brands looking for new franchisees? You could find your perfect franchise here.