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Advantages and Disadvantages of Franchising

Advantages and Disadvantages of Franchising

To understand the advantages and disadvantages of franchising you need to have a basis for comparison. There are other ways to realize your dreams through business ownership and you should look at those too.  You could instead buy a business opportunity or create a business from the ground up. There are definite advantages and disadvantages to owning a franchise business over these other options.  To know which path is right for you, you should first look at your motivations and qualifications for business ownership.
Let’s consider three scenarios:

Scenario One

You have been laid off after 20 years. Even before the layoff, you realized you had reached the ceiling on your salary.  Your possibilities for advancement in your career had also diminished. Your company has given you a cash settlement and you are keen to take charge of your life.  You want to become your own boss and learn some new skills along the way. You want a good income and are willing to put in whatever hours necessary to jump start the new career.  Your overall goal is to eventually work reasonable hours and have more time for yourself and your family.
If your history is similar, you are probably an excellent candidate for franchise ownership.  Here’s why:

  • This path allows you to benefit from a proven system of operations
  • The franchisors training program that will quickly get you up and running
  • As you have no previous business ownership experience, the ongoing support you will receive from a franchisor will be vital to your success

Many franchise opportunities offer a turnkey package that will include almost everything you need to start your business. In addition, most franchisors require no previous experience in their industry so you can be open to a variety of types of businesses and won’t need to stick to the one industry you know.

What will you perceive as a benefit or a disadvantage?

Franchisees can take advantage of lower cost materials due to group buying power. They also learn from each other and usually form a peer support system. Because you won’t be occupied with every minute detail of owning a business as you begin down the path of franchising, you will be able to concentrate on growing your business.
One disadvantage to franchise ownership is that you must follow a franchisor’s rules. You are in charge as long as you follow and adhere to all of the elements of the franchise system. This is necessary so that the franchisor can offer consistency across the brand – and let’s face it, they’ve done the research and tested the procedures so their way is usually the right way. This is also a benefit to the consumer who can expect comparable quality products or services no matter which franchisee he patronizes, anywhere across the country or around the world.
The other perceived disadvantage is that a franchisee must pay royalties and sometimes a marketing fee to the franchisor. Royalty payments are compensation for everything the franchisor provides, including access to the brand, the operating system and related items. The franchisor uses the marketing fee to provide advertising to build the brand and drive market penetration at a greater level than a franchisee could do on his own. Also, marketing funds enable franchisees to benefit from professionally produced marketing materials.  They also can realize efficiencies from commingled funds.

Scenario Two

As a truly entrepreneurial individual, you are brimming with ideas for new products or businesses and love to “tinker” with things until they are just as you want them. You are strongly attracted to the idea of being your own boss and don’t like the idea of answering to others. One of your strengths is the drive to follow through on your plans. Your background includes a variety of disciplines, including sales, marketing, accounting and management, so you are not looking for outside support. Money isn’t a concern as you have plenty to spend on researching and developing your product/service.  Because you intend to do significant research, a predictable time frame for break even isn’t on your radar at this point.
If you are like this type of person, one who likes blazing his own trails, franchise ownership is not for you. Instead you will be more comfortable setting up your own business using your own ideas. This is the most risky way to become your own boss because you will not have the proven operations system, nationwide brand and marketing, and the ongoing support of a franchise company. You may also have more difficulty obtaining business loans and the time from inception to when you start turning a profit will be hard to predict. On the plus side, you will owe no royalties and can run you business just as you please.
Historically this is the model least likely to succeed on average so it is recommended only for truly exceptional individuals who have the desire and stamina to start their own business based on their own unique idea or approach.

Scenario Three

A varied work history has given you some great skills which you wish to put to use running your own business. You are not concerned about the type of business you buy but want to have freedom to run it your way. You would be okay with a certain degree of risk but also recognize the advantages of an established system of operations. Marketing assistance and training, however, may be under developed or nonexistent. Although you don’t have a lot of cash to invest, your spouse works so you will have income for the time it takes your business to begin making money.
If you’re the type of person who will never stop and ask directions, a business opportunity may be the right type of business for you. This is a business you buy outright and have the freedom to run your own way. The benefit of a business opportunity is that they generally provide you with a successful business model and possibly some training, and marketing assistance. The initial investment is usually lower than for a franchise and there are no ongoing royalty payments.
A downside to business opportunities is that the seller isn’t invested in your success or failure.  Because he makes all of his money up front, you won’t have extensive ongoing training or assistance.  There won’t be a national marketing program, research and development, etc. The risk factor is probably greater than for owning a franchise but could be less than starting your own business.

Which business ownership path is best?

The answer to this question is as unique as each individual. For many people, franchising has proven to be a viable way to become a business owner. For the most part it offers the lowest risks and the highest level of support. Because a franchisor doesn’t succeed until the franchisees do, you’ll find a team of dedicated professionals willing to help you. They’ll be with you every step of the way, from site selection to employee hiring to grand opening. They will keep in touch with you from the very beginning to years down the road.  The franchisor will have web sites, toll free numbers and dedicated staff to make sure all your questions are answered quickly.

What is the cost of continued support?

The cost of this continued support is usually in the form of royalty payments and most franchisees feel the benefits are worth the expense. Research and development is possible because of feedback from those in the field and this cooperative involvement is a hallmark of a well-run franchise business.
The final benefit of franchising is that you buy a package. You receive the product or service, brand name and trademarks.  This package includes marketing and advertising, operations manuals and proven systems.  Also included is typically thorough training in every aspect of the business. You can totally change careers without years of schooling or apprenticeship or research. One day you can have a “job” as accountant or police officer and a few months later have a “career” as the successful business owner.  Who knows what this may look like!  You may end up owning a business you never would have dreamed of.
If you have the initiative, patience and drive to start a business, sufficient finances and enough business experience to go it alone, franchising may not be for you.  You may wish instead to purchase a business opportunity or to start your own business. This is especially true if you are someone who would not be willing to follow a franchisor’s system.
The most important component is not the business itself but what you bring to the business. So follow whichever business ownership path fits you and enjoy being your own boss!