A franchise is a business model that is recognized in the business world. In a franchise, a business owner offers the right to an individual or organization to run a similar business model. Before you venture into buying or giving out a franchise, you need to understand the advantages and disadvantages of a franchise.
Advantages of a Franchise to a Franchisee or Buyer:
a. Easy Way to Start a Business: One smart way to start a business without starting from the scratch is to buy into a franchise. This saves you time and the long process involved in running a business.
b. Reduces Failure Rate in Business: It is said that a good percentage of new businesses fail after its first few years. The general failure rate for franchise business is quite low. That is because the franchise owner has built the business into a profitable venture before issuing franchise. Thus, the franchise will ride on the success of the Franchisor.
c. Lucrative: The franchise business is presumed to have built a customer base and brand. Thus, it is easier to make profits from a franchise than from a business you start from scratch. You can take advantage of the brand name of the franchise and start making profits almost immediately.
d. Less Cost: It is less expensive to buy into a franchise than to start a business from scratch. For a franchise, you only need to pay the franchise fee and the annual renewal. For a personal business, you have to pay the cost for incorporating the business and also obtain a business license, rent, and other necessary expenses.
e. Business Support: You don’t need to have knowledge of the technical aspect of running the business to buy into a franchise. This is because the franchisor always provides training and support to franchise holders in the business. This saves you from having to figure out a lot of technicalities in the business.
Disadvantages of Franchise to a Franchisee or Buyer:
a. Request for Timely Payments: To buy into a franchise, you are required to pay a certain sum. Also, to maintain the right to continue using the franchise, you will be required to pay some renewal fee. This renewal fee may cut in deeply into the profits of your business.
b. Performance may be affected: The performance of other franchisees may determine the performance of the franchise. For instance, bad performance of the franchise in another part of the time may affect your own business.
c. Refusal to Renew Contract: The contract for a franchise is not a life-long contract. The contract is usually renewed annually or after a couple of years. There may be issues that may result in refusal to renew the franchise contract.
d. No Independence: Finally, you don’t enjoy independence when you are running a franchise business. There is a limit to how you run your business. For instance, you need to stick to a pricing plan or a particular number of products. This inhibits you creatively in the business.
Advantages of a Franchise to a Franchisor or Owner:
a. Expand Business: Running a franchise is one smart way to grow and expand your business. With a franchise, you can expand your business to other parts of the country or even to other countries at no personal cost. Most big brands had to apply the franchise business model to expand their brands.
b. Source of Income: Franchise, if done right can be a source of external income for your business. People pay money to buy into a franchise and also pay money to renew the right to continue using the franchise. It can be a significant source of income to grow your business.
c. Reduce Growth Risk: With a franchise, you can quickly expand your business without little or no risk from you. The franchisee bears the risk alone.
Disadvantages of a Franchise to a Franchisor or Owner:
a. Destroy the Image of Your Business: The franchisee can run your business in a way that will destroy the brand you’ve spent time and money to build. Since you don’t have 100% say on how a franchisee chooses to run their business or management, you may end up putting your business brand and image at risk.
b. External Support Can be Difficult: Most franchisees don’t have the technical knowledge to run the business, they depend on the franchisor for technical support. Providing this technical support for a large number of franchisee can be time consuming and put strain on the business.