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Advantages and Disadvantages of Franchising for Franchisors & Franchisees

There are many advantages and disadvantages to franchising. In this video, Charles N. Internicola goes through both disadvantages and advantages from the fra...

The Advantages and Disadvantages of Franchising

So this is an extremely important topic that does require some evaluation. The answer will depend and vary depending on who you are and what your goals are. For example are you a successful business owner interested in expanding your business through franchising (a future "franchisor") or are you an individual looking to make a change and to buy a franchise (a future "franchisee").

The advantages and disadvantages vary depending on:

  • If You Want to Franchise Your Business
    If you are a successful business owner and you want to expand then‚ naturally‚ franchising is an option that you will want to consider. The advantages of franchising your business are listed in detail below but they all revolve around the fact that franchising will permit you to expand your local business through the efforts of your future franchisees. That is‚ your future franchisees (if they qualify) will use their capital to duplicate your business at a new franchised location and they will pay you a franchise fee and a continuing royalty. As to the disadvantages to franchising your business‚ well they relate mostly to the effort that you will need to put in to establish a franchise system. To learn more about how to franchise your business, read The Ultimate Guide to Franchising Your Business. Below you will learn more about advantages and disadvantages.
  • If You Want to Buy a Franchise
    If you are an individual and you are looking to either change your career‚ start a new business or enter the world of entrepreneurship by buying a franchise then the advantages and disadvantages of franchising will all depending on selecting the right franchise system. What do I mean? Well the advantages to buying a franchise - for you - should relate to investing in a proven business model with well established systems‚ products and services. The "advantage" being that the franchised business should serve as a competitive advantage. Now‚ the "disadvantages" to buying a franchise all‚ basically‚ will relate to selecting the wrong franchise system. That is you select a franchise system that does not offer you a true competitive advantage.

The Advantages and Disadvantages of Franchising - If You Want to Franchise Your Business

The Advantages to Franchising your Business

Some of the advantages to franchising your business include:

  • 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 who do not possess a vested interest in the business.

The Disadvantages of 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 establishment of a franchise system requires the investment of capital to cover legal fees and the cost of establishing a franchising infrastructure.

The Advantages and Disadvantages of Franchising - If you Want to Buy a Franchise

The Advantages to Buying a Franchise

Some of the advantages - provided that you choose the right franchise - of buying a franchise‚ 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.

The Disadvantages of 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.