The Internicola Law Firm, P.C.

Advantages and Disadvantages for Franchisors and Franchisees

Franchising is a business distribution model focused on brand development and unit expansion based upon the collaboration and combined efforts of both franchisor and franchisee.  For the successful entrepreneur and prospective franchisor considering the establishment of a franchise system (i.e., "franchising your business") there are a number of franchising advantages and disadvantages that must be considered.  Likewise, for the prospective franchisee looking to buy a franchise there are franchising advantages that should be considered.

• Capitalized Expansion - Expansion requires the investment of capital and resources that for many successful business owners is limited and, sometimes, difficult to raise. Franchising serves as a source for the capitalized expansion of a successful business. Rather than borrowing funds from lenders, franchisees invest their own funds to expand your business.
• Continuing Revenue Streams - Successful franchisors benefit from continuing royalties that are, typically, based upon a percentage of franchisee gross sales and paid on a monthly basis.
• Brand Development - The Multi-unit expansion associated with franchising serves to supplement and expand the value of your brand.  Franchisee contributions to local and regional advertising further serve to expand brand recognition.
• Economies of Scale - If managed properly the multi-unit expansion associated with franchising results in increased volume purchases and leverage with business suppliers and vendors.
• Managerial Talent - Franchisee owners - who have invested their own capital and savings - typically serve as better managers and operators than paid employees whodo not possess a vested interest in the business.
• See the Video, "Franchise Your Business"

"DISADVANTAGES" TO FRANCHISING YOUR BUSINESS - Some of the disadvantages to franchising your business, include:

• Legal Regulation - Franchising is a regulated activity and requires compliance with federal and state franchise laws.  To successfully establish a franchise, franchisors are required to work with an experienced franchise lawyer to establish a solid blueprint for franchising.;
• Investment - Although franchising serves as a source for the capitalized expansion of your business (i.e., franchisees invest in your expansion), the estabblishment of a franchise system requires the investment of capital to cover legal fees and the cost of establishing a franchising infrastructure.

PROSPECTIVE FRANCHISEES
ADVANTAGES TO BUYING A FRANCHISE - Some of the advantages - provided that you choose the right franchisor - include: 

• Established Brand - Compared to establishing a new business, your franchised business - from day one - will possess an established brand recognized by consumers;
• Established Business Systems - Your franchised business will benefit from established business systems and procedures that have been tested and proven in the marketplace.
• Training and Support - Your franchise business will benefit from the franchisors continued training and support.  This includes initial training and support that should be ongoing and extend to your business operations and the continued development of the products or services that you will be offering.

DISADVANTAGES TO BUYING A FRANCHISE - Some of the disadvantages to buying a franchise, include: 

• Benefits Could Prove Illusory - If you choose the wrong franchisor, the typical "benefits" associated with buying a franchise may prove to be an illusion.  That is there are good franchisors and franchise systems and there are bad franchisors and franchise systems.  If you choose the wrong franchisor and fail to thoroughly evaluate the franchise agreement, training, ongoing support and brand recoognition may be non-existent;
• Potential for Reduced Margins - As a franchisee you will be required to pay on-going royalties.  These royalties, typically, are based on your gross sales and not your profits.  So, royalties will impact your profit margin.  So, make sure that the franchise opportunity and the value of the franchise system outweighs your additional cost.