Top chains like McDonalds and Subway have a strong presence in several countries across the world. Although such companies have the financial strength to establish and operate their own outlets worldwide, they prefer to franchise independent stores. This gives the franchised stores the right to use the franchisor’s trademark and business model for a specified period of time.
Franchising has its own set of pros and cons, so you should be armed with facts before becoming a franchise owner or franchisee. Here are the top 10 pros and cons of franchises.
Global brands have a solid reputation, and customers easily identify with their colors and logos. After your business becomes a franchise, it will likely experience an influx of customers and consequently, profits will go up. Ever drove to a petrol station to refill your tank but couldn’t resist the temptation of catching a cup of coffee in a Starbucks nearby?
Once you have closed the deal with your franchisor, it won’t wave you goodbye. To ensure the products and services you offer meet the quality benchmarks, the franchisor will provide you with a range of support services, including staff training.
Low on Cash? No Problem
If your franchised business fails to acquire customers as expected or runs into financial problems, you can rely on your franchisor for financial assistance. Alternatively, you can count on your business’s increased reputation to secure a bank loan.
It is very rare to find competing businesses --like Crimson Cup and Starbucks-- located side by side. One marks its own territory and the other stays away. This is what your franchised business will acquire. You can sleep soundly knowing a competitor is unlikely to set up shop nearby and grab some of your customers.
Lazy Innovator? Good for You
As a franchise owner, you don’t have to invest your time and energy into creating into innovative products and services to attract customers. You have paid the franchisor, so your job is to follow his or her proven business model. In any case, it is the franchisor’s role to improve existing products and develop new ones.
As is the case with becoming a McDonald franchisee, it can cost you up to $45,000 to secure a franchise license. According to Entrepreneur, an aspiring McDonald franchisee should also have $750,000 in cash. Although some franchisors have friendly franchise fees, other requirements make it difficult for the average entrepreneur to buy and operate a franchise.
Legal Mumbo Jumbo
Prior to acquiring a franchise license, you will receive a Franchise Disclosure Agreement (FDA) – which could run into more than 100 pages— from the franchisor. To say the least, FDAs are typically written in a legal language that can only be understood by law graduates. If you are not one, you will need a lawyer.
If you want your business to have a certain look and feel, then don’t go the franchise route. Many franchisors require all outlets to have the same look and feel, so franchised stores must be painted according to the parent company’s desires.
Reduced Decision Making Responsibility
Although franchise owners can make basic operational decisions – like changing suppliers – major business decisions are made by the franchisor. If the company makes a decision that negatively affects its business model, your franchise will be affected too. With the franchise agreement in force, you can do little about it.
Of Profits and Royalties
So you thought all you need to fork out is the franchise fee? Well, throughout the period of your franchise agreement, you will pay a certain percentage of your monthly profit to the franchisor, as a well as a royalty fee, which is calculated as a percentage of your gross sales.
As much as franchises have the potential to become very profitable, it’s your job – the aspiring franchise owner -- to select a reputable franchisor who can give your business the support it needs to succeed.
Are you a franchise owner? Please feel free to share your experience with our readers.