Franchising: Advantages, Disadvantages and How to Buy a Franchise

1. Business assistance

When you buy into a franchise, you gain access to the knowledge of the franchisor. They can serve as a deep reservoir of business assistance to guide you through the process of owning and operating a business.

2. Brand recognition

Franchises are already well-known businesses with established customer bases built in. So when you open a franchise with this recognizable branding, people will automatically know what your business is, what you provide and what they can expect.

3. Lower failure rate

In general, franchises have a lower failure rate than solo businesses. When you buy into a franchise, you’re joining a successful brand as well as a network that will offer you support and advice. Plus, a franchise has already proven its business concept, so you have reassurance that the products or services you’ll be offering are in demand.

4. Buying power

A network of franchises has the opportunity to purchase goods at a deep discount by buying in bulk. The parent company can use the size of the network to negotiate deals that every franchisee benefits from. A lower cost of goods lowers the overall operation costs of the franchise.

5. Profits

In general, franchises often recognize profits faster than independently established businesses. Most franchises have recognizable brands with an established customer base. Dedicated customers + sales = profits.

6. Lower risk

Starting any business is risky, but the risk is lower when opening a franchise. One of the reasons franchise owners face lower risk than independent business owners is the franchise network. Most franchises are owned by established corporations that have tested and proven the business model of the franchise in multiple markets.

This lower risk may also make it easier to access franchise financing options.

7. Built-in customer base

One of the biggest struggles of any new business is finding customers. But franchises come with a loyal customer base. Even if you’re opening the first branch of a franchise in a small town, the likelihood is that potential customers are already familiar with the brand from exposure to TV commercials or travel to other cities.

1. Restricting terms of the agreement

While you may be your own boss as a franchisee, you’re not entirely in control of the business since you must follow the restrictions laid out in the franchise agreement. The franchisor can exert a degree of control over the majority of the franchise business and decisions you make.

2. Initial cost

While the initial investment of the franchise fee buys you a lot of benefits, it can also be costly — especially if you’re joining a very well-known and profitable franchise. Even if you opt for a low-cost franchise, you’ll likely still have to front a few thousand dollars.

3. Ongoing investment

In addition to the initial investment you’ll have to make to start your franchise, there are ongoing costs, which you should find clearly listed in the franchise agreement. These costs may include royalty fees, advertising costs and a charge for training services.

4. Potential for conflict

Any close business relationship, especially when there’s an imbalance of power, comes with a risk that the parties won’t get along. Whether it’s lack of support or simply a clash of personalities, the closeness of the business relationship between franchisor and franchisee can result in conflict.

5. Limited ability to experiment

As a franchisee, you’re beholden to the creative vision of the franchisor and any stipulations outlined in the franchise agreement. While you manage yourself day to day, the franchisor is ultimately in control of the brand, advertising materials, products and additional details of how the business looks and operates.

1. Access to capital

Franchising your business will take some time and money on your end, but it also has the potential to make you a lot of money in the form of franchise fees. The business expands as capital becomes available from franchisees, so you don’t need to take on debt through loans.

2. Efficient growth

When trying to grow your small business, starting a franchise can make opening multiple locations a much simpler process. Opening the first unit of a business is costly and time consuming, and opening a second unit can be almost as difficult. But when that burden is shared with another business owner, it makes the process more efficient and takes the onus off of you.

3. Minimal employee supervision

As a franchisor, the only support that you have to provide to the franchisee is training and business knowledge. In general, the franchisor has no hand in the management, hiring and firing of employees. This minimal employee supervision allows the franchisor to focus on the growth of the business instead of day-to-day operations.

4. Increased brand awareness

The more locations your brand has, the more people are aware of your brand. And the more these customers come to know and love your brand, the more profitable and successful it can be.

5. Reduced risk

Because the franchisee takes on the debt and liability of opening a unit under the name of the franchise, the franchisor gets all the benefit of an additional location without taking on the risk themselves.

1. Loss of complete brand control

When a franchisor allows a franchisee to open a business under their brand, they’re giving away (actually, selling) some of the control over their small-business branding. While the franchise agreement should contain strong stipulations and rules to guide the decisions made by the franchisee, your franchisees won’t be clones of you. They will think and act differently, and your brand could wind up suffering because of it.

2. Increased potential for legal disputes

Any time you enter into a close business agreement with other people, you open yourself to the risk of legal disputes. While a well-crafted and lawyer-approved franchise agreement should limit a lot of the possibilities for legal disputes between the franchisor and franchisees, these disputes are still possible.

Any legal disputes that must be resolved in mediation or through the court system can be costly in both time and money, which takes away from the success of the franchise.

3. Initial investment

Starting a franchise requires an initial investment of both time and money on the part of the franchisor. You’ll have the initial costs to set up the franchise system. You’ll need to be sure that the franchise agreement is written clearly and reviewed by a lawyer experienced in franchise law. You may also hire a franchise consultant for expertise during this process.

4. Federal and state regulation

Dealing with the federal regulations set down by the Federal Trade Commission for franchises can be a nuisance for franchisors. These regulations ensure that franchises are operated fairly, but meeting all of the regulations does require time and effort from the franchisor.

And while you don’t have to file your agreement with the federal government, you do have to file with some states — and you will have to make sure you’re compliant with different state’s laws. This can be a time-consuming process but can be made easier with professional guidance.