Franchising advantages and disadvantages

When you buy a franchise, you’re buying the right to use a prescribed ‘business format’ with an established brand, products, and business processes, for a set period. 

The business format is owned by the franchisor, who has developed it over time. They sell the rights to use their business format to franchisees, who pay an initial fee and ongoing royalties.

Franchising is a popular option for people wanting to go into business for themselves, because it can remove some of the risk and effort in setting up an independent business from scratch. In fact, statistics show franchises have a much lower failure rate than new business start-ups. 

However, like all businesses there are no guarantees of success and not all franchises are a good bet. It’s essential to consider the following pros and cons before you buy a franchise.

When you buy an existing franchise, the name and reputation of the company are already established. You can leverage the brand’s reputation in market. Customers, suppliers, and staff are often more comfortable dealing with you because they know what to expect.

But what if things change? You may suffer if the brand loses its appeal to customers (for example, as a result of poor performance from the franchisor or other franchisees). Your ability to pivot, control the narrative, and ‘right the ship’ may be limited.

As part of a network, your business can be advertised more widely and more often, with economies of scale. You’ll also potentially benefit from marketing activity that other franchisees have undertaken (for example, in a nearby territory).

However, marketing plans may be limited to what is set by the franchisor. This could be a national or international approach that might not work for your region. And if you’re a creative type, or particularly entrepreneurial, the restrictions may be too limiting.

Franchisors will often foot the bill for training, induction, and onboarding into the franchise (but check your agreement, as this varies between franchisors). The training provided can sometimes mean that you’re able to enter a business or industry without necessarily having prior experience. 

Make sure you’re aware of any ongoing training costs and audit requirements, as these can require a substantial financial investment.

A franchise is only as successful as its franchisees – so most franchisors provide ongoing support, including operating manuals, HR support, and site or equipment assistance. You’ll likely have access to a network of other franchisees to share ideas and learn from their successes. Just make sure you factor in the costs of attending meetings and conferences – many franchisors will require you to attend these at your own expense. 

A proven business model and brand are key, but don’t underestimate the ongoing role of the franchisor. Here are just a few of the things that a good franchisor will offer, not just at the start, but as your franchise grows.

• Innovation – keeping your business thriving through new technology and better ways of working.
• Benchmarking – updates on how your business compares to other franchisees and the wider industry.
• Updated manuals and guides – practical tools on how you can implement better processes and practices.
• Research – useful information about current industry and market trends.
• Planning – helping you prepare for the future with updated plans and methods.

Because the franchisor has a proven system for establishing new franchises, they’re likely to work with you to set up your new business in the most efficient way. However, there are often specific franchise requirements (such as shop fitouts) that can be costly to purchase upfront. Because of the nature of a franchise, you might not have much wiggle room to negotiate these costs.

The franchisor may negotiate and buy in bulk on behalf of all franchisees, so there’s often potential to benefit from economies of scale. But you may be restricted to purchasing from certain suppliers, which might not be the most beneficial or cost-effective for your region.

Owning a franchise may have unexpected financial benefits. For example, lenders are sometimes prepared to lend more to franchised businesses because of their strength and reputation, which could help your business grow faster. 

In some circumstances, you’ll have to pay fees to the franchisor even if you don’t make a profit. It’s important to review the terms of the franchise agreement carefully so you know what you’re getting into.

Franchises carry restrictions which may not suit you if you have big dreams. For example, if you want to sell your business to a third party, you’ll usually have to seek approval from the franchisor first. Ultimately, you have less control over how the business is run and less freedom to do things your way.