Franchising can be a great way to become an entrepreneur without much of the risks involved with conventional businesses. Before you buy a business or opt for a franchising opportunity, make sure to consider these factors.
Advantages of franchising
- Minimal risks: One of the biggest advantages of franchising is that there is very little risk involved. If you were to setup a business, it could involve plenty of risk as there is never any guarantee it will succeed. However, with franchising, you are promoting and running a business, which is already established and successful. Hence, the risk is lower.
- Reputed brand: Another advantage of franchising is that the business for sale has an established brand. Customers know about the company’s reputation and they will be more willing to buy products.
- Support: You will be given all the training as well as support you need to buy a business and run it effectively. Thus, franchising is a great start for entrepreneurs who are lacking in prior experience.
- Advertising materials: You also get access to all advertising and promotional materials needed to run the business for sale.
- Financial aid: The biggest advantage of franchising is that you get ready access to financial assistance. You can either contact your franchisor or a lender for such aid. Usually, lending companies give financial aid to franchisees more readily as compared to conventional startup companies. The main reason for this is that the risk is lower.
Just as there are certain advantages to franchising there are also many disadvantages. These are listed below:
- Lack of control: Probably, the biggest drawback about franchising is that you stand to lose control on the creative and operational aspects of the business. Since you are essentially promoting another brand, you need to listen to their instructions and cannot deviate in any manner. There are often very stringent parameters and rules, which need to be followed.
- Upfront costs: Before you can setup your franchise operations, you will need to pay a bulk deposit amount. This can prove costly, especially if you are not equipped with proper financing.
- Royalty: Several franchise opportunities require the franchisee to pay royalty fees everytime there is a sale. These can be applicable even when your franchise business does not prove to be profit generating!
- Approval of location: The place where you establish your franchise business will need to be approved by the franchisor. Even if you like a particular site location you may not be able to go through with it if the company disapproves.
- Mandatory purchases: You will also need to buy certain items from the franchisor, for the purpose of marketing and selling. These supplies may carry forward into the next month (if sales have been slow), resulting in accumulated losses. In addition, the franchisor will have their own vendors whom you need to purchase the supplies. Even if you find a cheaper vendor, you cannot source supplies from this vendor.
- Territory demarcation: Franchise opportunities usually come with defined territories, within which you can operate. This often affects the growth and sales of the business.
Business renewal: Franchise businesses are also set for definite timeframes. If your business has not shown positive performances and growth your business may not be renewed.