The Advantages and Disadvantages of Franchising

Franchising is a very common word heard through out the business world. This is when a company decides to allow individual buyers open a store using their brand and their products. The original owners of the brand establish how the franchise runs and the guidelines that must be followed, which the franchise owner has to cooperate with. This has been one of the most successful business models to date. Places like fast food chains, gas stations, and restaurants all depend greatly on the opening of new franchise locations around the country and the world. There is a substantial amount of benefits that franchising offers to both the business and franchise owner, but with anything that seems this great, there are pit falls to the franchise world as well.

Advantages of Franchising

1. Tried And True Method
Franchising has been a way of business expansion for nearly 200 years. Major companies like McDonald’s have used franchising as a way to build a world wide empire for their business. There are countless examples of franchise success, which is the biggest draw to franchising for smaller businesses.

2. Small Risk, Big Expansion
The key to gaining recognition and success for any type of business is to expand. When you open multiple locations you have the ability to begin truly building your brand, gain name recognition, and reach a broader customer base. Franchises allow businesses to this with very little risk. The franchise owners typically pay the majority of costs associated with opening the new location.

3. Established Brands
When it comes to buying a franchise, it can be one of the most intelligent and profitable ways to own your own business and be your own boss. Instead of starting from scratch and trying to forge your own name and place in your industry, with a franchise, you start right off the bat with a highly successful and recognized name and brand. This includes the products that you sell.

4. New Products and Marketing Are Out of Your Hands
One of the biggest parts of having a continually successful business is keeping up with the competition when it comes to new products and marketing. This can be a big hurdle for many small business owners, but when you own a franchise, innovate, design, and marketing is constantly being done for you, and on the company’s dime. You do not have to come out of pocket for big time marketing and state of the art product research.

5. Financial Assistance Is Often Offered
Depending on what company you are trying to open a franchise underneath, they may offer some form of financial assistance to you. Often times, companies are desperate to find someone to invest in their franchise and open a new location that they will do just about anything to make it happen.

Disadvantages of Franchising

1. Franchise Fees Are Expensive
The exact amount that you have to pay to gain the rights to open a franchise depends on the company, but the more successful the brand, the more expensive it is. These fees must be paid in addition to all construction, equipment, supplies, and all other costs associated with opening the location.

2. Less Control Over Your Brand
Franchises are representing your business. They are using your name and are tied to you completely. This is a huge risk for companies, especially ones who have not yet expanded very much, because if a customer has a bad experience at one location, it reflects the entire brand. When you allow people to run your stores and represent you, you have little control over the day to day operations.

3. Contracts Require Renewal
If you want to own a franchise you have to go through an in depth process. This includes an application being approved, and a contract being negotiated. This contract is generally in the terms of what is best for the brand and not your franchise. These contracts also require a renewal at some point, it could be 5 or 30 years, but they will require your to go through the process again in order to keep operating the franchise. If your contract is not renewed, you no longer own the franchise.

4. Starting In The Middle
For entrepreneurs that have a clear vision of how they would run and manage a business, a franchise may not be the best option. This is because owning a franchise is similar to starting a race in the middle. You lose all of the trial and error lessons that are gained when starting from scratch. You also do not have nearly as much control over things like products, marketing, or creativity.

Important Facts About Franchising

  • Fast food restaurants are the fastest growing, and most successful, types of franchises.
  • There are over 750,000 franchise location currently open in the United States.
  • Albert Singer, the founder of Singer Sewing Machines, is considered to be the father of the modern day franchise model.
  • Franchises make up an impressive 8.8 million jobs in the United States as of 2015.
  • Dunkin Donut’s franchise locations serve over 3 million people each and every day.
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