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Entrepreneurs who have developed a successful business often wonder if they

should franchise as a way to expand their operations. Like any business model,
franchising has its benefits and drawbacks.

There's no way to know for sure whether franchising is right for your company
until you evaluate its pros and cons in the context of your operations. That
usually requires the help of a franchise attorney or consultant, but before you
start talking to the experts, you should get a sense of the key advantages and
disadvantages of a franchise business.

Franchising offers three major benefits to business owners seeking to expand


operations:

Related: Franchise Forecast Continues Strong for 2013

Access to better talent. Franchising is a great way to find talented people to


manage your locations and give them an incentive to work hard. The most
qualified and hardest working people generally prefer to invest in running a
business in return for profits rather than taking a salary as an employee. So by
franchising, you are going to get better talent that will work harder to build the
business than you would by hiring someone to work for you.

Easy expansion capital. Franchising is a good way to obtain expansion capital.


Because your franchisees pay to buy outlets in your chain, you can grow the
number of locations without tapping much of your own capital or needing to
request financing from banks or investors.

Minimized growth risk. Franchising can generate high financial returns for
relatively little risk. Unlike adding company-owned outlets, when you franchise,
you put relatively little money into adding each location. If you have a good
business model, you can earn high royalties from sales at those outlets. The
percentage returns you earn can be many times what you would have earned if
you opened and ran the outlets yourself.

Related: Lending to Franchises Reaches the Highest Level Since the


Recession

Offsetting these positives are three major disadvantages of the franchising


business model:
Less control over managers. You can't tell franchisees what to do the way you
can with employees. Franchisees are independent businesses. Moreover, they
have different goals from yours, which can easily conflict and even lead to legal
trouble. Consider the classic example: Franchisors make money by collecting a
percentage of sales as a royalty for letting the franchisee use their brand name
and operating system. Franchisees make money from the outlet's profits.
Anything that boosts sales, but not profits will create conflict between you and
the franchisee. If you want to offer customers promotional coupons, franchisees
may likely object. Coupons boost sales, but not always profits, benefitting the
franchisor, but not necessarily the franchisee.

A weaker core community. It's more difficult to get franchisees as opposed to


hired store managers to work together. Franchisees have an incentive to profit
from each other's efforts to generate business. For instance, your franchisees
might try to get out of paying for the advertising needed to attract customers,
figuring they will get the customers anyway if other franchisees buy the
advertising. Of course, if all of them do the same thing, you end up with no
customers because you've got no advertising. There are ways of minimizing
franchisee free riding, of course, but those cost money and require enforcing
your franchisee contracts in court.

Innovation challenges. It's a lot harder to innovate with franchising than if you
own your own outlets. With franchising, if you come up with a new idea, you
have to negotiate with your franchisees to get them to accept the new product or
whatever innovation you want to introduce, instead of just putting the new idea
in place on your own.

Before you talk to the experts about franchising your business, consider these
pros and cons. Franchising isn't a silver bullet for business expansion. But when
the advantages outweigh the disadvantages, it can be a great way to grow your
business.
Benefits of the Franchise Relationship
A franchise system enables the franchisor to concentrate on developing and expanding the franchise system
while not having the responsibility for the day-to-day operations of the franchise outlets. Each franchise
outlet is typically owned and operated independently by a third party, the franchisee. This structure permits
the system to grow significantly faster than it could otherwise.
From the franchisee’s point-of-view, the franchisee is able to own and operate a business that may already
have significant goodwill in the marketplace. As well, the franchisee is able to participate in a system that has
already been proven to be successful. This removes a significant amount of the risk associated with starting
up a business. Another benefit to the franchisee is the fact that the franchisor typically provides a significant
amount of guidance to the franchisee in the day-to-day operations of the franchised business. Since the
franchisor has already figured out what works and what does not work for the particular business, the
franchisee will have the benefit of that information.
From the consumer’s standpoint, a franchise system represents a known offering of goods and services,
reducing the risk to the consumer of an unsatisfactory experience. As an example, consumers know exactly
what they will be getting when they order a Big Mac at a McDonalds even though the customer may never
have been at that particular McDonalds location. Consumers will also have comfort in other matters such as
the standards of cleanliness and safety that are maintained by McDonalds.
Risks of the Franchise Relationship
Of course, franchises have their risks. From the franchisor’s point-of-view, one of the most significant risks
arises from the loss of direct control over the manner in which the franchised business is operated. A single
bad experience at a franchise outlet may result in a consumer refusing to visit every other franchise outlet in
the future.
For the franchisee, there are also a number of risks and obligations. The most notable obligation is the
ongoing payment requirement to the franchisor just for the right to operate the franchised business. These
payments would not have to be paid if the franchisee started a business independently of the franchise
system. However, these fees often represent the additional value to the franchisee due to brand recognition
and the existing goodwill in the marketplace as well as the reduced risk through being able to own and
operate a proven business model.
Another risk or limitation to the franchisee is that the franchised business must be operated within the strict
requirements set by the franchisor. This may limit the modifications the franchisee may make to the product
and service offering. This lack of control over the business may be a source of frustration for the franchisee as
he or she may not be able to pursue available opportunities. However, most franchisors do provide for some
flexibility, recognising that market conditions may differ from location to location. For example, McDonalds
offers the McLobster in the Maritimes and the Ebi Filet-O in Japan, which is basically a burger made from
shrimp. Financial risk is certainly a potential for any franchisee. By signing a franchise agreement, the
franchisee is making a long-term commitment to operate the franchised business. If the franchised business
is not profitable for any number of reasons, the franchisee could suffer substantial losses over an extended
period of time.
Summary
The franchise relationship can be a fairly complex. A franchise can be rewarding for both the franchisee and
the franchisor. The franchisor gains the opportunity to expand the franchise system while at the same time
acquiring someone who is passionate about the business to look after the day-to-day operations. The
franchisee gains the opportunity to own and operate a proven business and to participate in the related
financial rewards.
George A. Wowk is a partner at Burnet, Duckworth & Palmer LLP and has practiced law since 1996. George
advises on all aspects of franchises, dealerships and distributorships, including advising on the setup and
branding of franchises. For more information please visit www.bdplaw.com

Advantages of Franchising
Explore a New Career, Work in a New Industry! No Experience Necessary
Buying a franchise allows you to work in a field that you don’t necessarily have
any previous work experience in, but that is intriguing to you. Franchise brands
(also known as franchisors) offer extensive and thorough support and training to
franchisees in order to educate them and help them understand their company’s
business model. By entering into a already established brand that has been
operating (assumedly) for years, you will be privy to knowledge, experience, and
industry secrets that you would otherwise have had to learn over the course of
your career through a trial and error process. Owning a franchise allows you to
tap into previous owners’ and leaders’ collective years-worth of first-hand
experience, increasing your chances of success.

After spending 25 years in the hospitality industry, working as an executive for a


global hotel brand, Kristi Janman decided it was time to pivot her career. She
knew she wanted to build a business that enriched the lives of others, but she
also knew that she did want to start from scratch. “I wanted to invest in a smaller
franchise with growth potential where I didn’t need a ten-year runway to build a
business. The franchise model was perfect for me,” she explained. In 2015,
Janman bought her first Nothing Bundt Cakes franchise in Kennesaw, GA.

Lower Risk

Franchises are a more secure investment than new businesses because they
have the support and backing of a larger, established corporation. These
corporations have business models that have been tested, often in different
markets across the country, and have already proven themselves to be effective.
Because of their history of proven success, getting a franchise business loan is
easier than getting a loan to start an independent business. The banks know that
investing in a franchise is a safer bet than investing in a new business that has
not yet had the opportunity to built up a history of success.

Loyal Customer Base and Brand Recognition

One of the hardest parts of starting any new business is finding your first
customers, which is one of the reasons so many people turn to franchising; when
you buy a franchise you get to bypass a lot of the work that goes into marketing
and branding a new, unknown business. Investing in a franchise grants you
access to an established, loyal customer base and potential employee pool.
Buying an established and recognized brand can give you an accelerated path to
profitability by bringing in customers and prospective employees from day one.

Collective Buying Power

When you purchase a franchise and become part of the franchise system, you'll
benefit from your franchisor's established deep-rooted relationships with
suppliers. This means that materials will be less expensive because of the
franchisor’s collective buying power.

Hit the Ground Running with Extensive Franchisor Support

Most franchisors prioritize supporting their franchisees -- especially when they


are just starting out -- by offering them pre-opening assistance with operations
like site selection, design, construction, financing, training, and grand-opening
programs. The help doesn’t stop there: Some franchises even give loans and
other forms of financial assistance to their franchisees.

Be Your Own Boss

Owning a franchise allows you the chance to be your own boss. You'll be able to
craft a more flexible schedule for yourself; revel in having more autonomy over
your career; you can even choose to work from home, if that’s what you want.
You’ll own a business while having a support system to turn to when you’re in
need of advice or assistance. In franchising, there’s a saying that you’re in
business for yourself, but not by yourself.

Renee Friedman, who bought her first FASTSIGNS franchise in 1993, was the
preferred signage vendor for the 1996 Olympic Village and currently owns and
operates a FASTSIGNS franchise in Central Orlando, explained, “Being part of a
strong franchise, provides opportunities and resources that would not be
available as an independent owner. If I need help, have a question about a
product or budget or hiring or anything, there’s someone standing by to assist
me. We have so much training at our fingertips!”

Disadvantages of Franchising
Initial Investment Can be High

Depending on which franchise you choose to invest in, the initial investment can
be hefty, especially for big-name franchises. There are, however, an assortment
of franchises that are affordable for any budget. As you research, watch out for
the monthly royalty fees that some franchisors charge their franchisees. The
royalty fee is typically 4 - 6 percent of your gross sales revenue and marks a
reduction to your profit potential. However, not all franchises charge royalty fees.
The cleaning service franchise MaidPro has no required marketing spend or
weekly royalty fees. The leather, plastic and vinyl restoration franchise Fibrenew,
on the other hand, offers a flat-rate royalty system that doesn’t require
franchisees to report on finances.

Creativity Can be Limited


Because franchises already have a predetermined brand, there are creative
limitations for franchisees who are looking to explore, alter or make additions to
their company’s business model or brand. There are also restrictions placed on
where you can operate, what products you can sell, and the suppliers you can
use because of the predetermined business model.

Financial Information is Shared with Corporate

Franchisors are continuously collecting financial information from their


franchisees in order to improve their business model and audit royalty payments.
As a result, franchisees have little privacy in their business’ finances.

On the other hand, the best franchise companies share a great deal of financial
information back with their franchisees. This allows them to benchmark their
performance with the rest of the franchise system. This can be a huge advantage
for franchisees to help improve their financial performance and business
profitability.

Overlooked Realities of Franchising


Weighing the advantages and disadvantages of franchising, as outlined above,
will hopefully help you determine if franchising is the right path for you.

If you do choose to embark on the franchising route, the following are important
things to keep in mind. Neither pros nor cons, they are part of the obvious and
often overlooked realities of franchising.

Marketing and Advertising Expenses

Many franchisors stipulate in their franchise contracts that franchisees must pay
for marketing and advertising expenses. Make sure to read through your contract
thoroughly so you are aware of all the conditions.

Franchising Contracts Aren’t Permanent

Another thing to keep in mind is that your contract with your franchisor is not a
permanent one. Once the contract has reached its end date, the franchisors have
the power not to renew it. On the other hand, you also have the ability not to
renew the contract if you aren’t happy with your franchise.

Group Endeavor

Remember that buying a franchise is a group endeavor. There’s yourself, your


franchisor, and every other franchisee who works under the company brand
name. This community can be supportive, empowering, collaborative, but it can
also be challenging. You need to be able to depend on all parts of your
franchising system; the blunders and failures of another franchisee can damage
the reputation of the entire franchise system, including your own. Make sure to
talk with other franchisees before purchasing a franchise so that you get a sense
for the franchise community you are buying into.

Advantages and Disadvantages of Buying a


Franchise
Franchising Pros Franchising Cons

Franchises have the support of big Predetermined branding limits creative


corporations with a business model that opportunities to alter or make additions to
has already been proven effective the franchise

Franchise business loans are easier to Monthly royalty fees, which most franchises
get than loans to start an independent charge and are typically about 4 percent - 6
business percent of sales, reduce your profit
potential

Franchises already have a recognizable Blunders of other franchisees can damage


brand and a loyal customer base, making your franchise’s reputation
it easier to recruit top-tier employees

Low supplies costs Restrictions on where you can operate, the


products you can sell, and the suppliers
you can use

Some franchisors offer loans and other Expensive initial investment for big name
forms of assistance to franchisees franchises

You are your own boss Once your contract has reached its end,
franchisors have the power not to renew it

Franchises offer pre-opening assistance Franchisees must share their company’s


like site selection, design, construction, financial information with their franchisors
Franchising Pros Franchising Cons

financing, training, and a grand-opening


program

Lower risk (relatively)

Explore a new industry where you don’t


necessarily have previous work
experience

Receive knowledge, experience, and


industry secrets from seasoned industry
leaders

Research is Key!
To find out if franchising is right for you (or which franchise is for you!), make
sure you do your research. Franchise Business Review has compiled a list of
franchises that offer the best franchisee satisfaction for your perusal. You can
also talk to other franchisees in the industry you’re looking at to hear their
experiences and investigate the level of support their franchisor offers. Or, if the
number of franchise opportunities is overwhelming you may want to consider
hiring a franchise consultant, who can help guide you and offer insight and
advice you may have been unaware of.

Once you’ve chosen a franchise that is a perfect fit for you, hire a franchise
attorney to assist you in understanding your franchise contract. Make sure, too,
that you’ve done adequate research on how you’ll finance your franchise.

As you explore your options, Franchise Business Review is here to assist with
educational content and unbiased market research that can save you time and
effort as you research franchise brand options and venture into the exciting world
of entrepreneurship!