SM/U4 Topic 2 Service Franchising-Benefits & Risks
Buying a franchise can be a quick way to set up your own business without starting from scratch. There are many benefits of franchising but there are also a number of drawbacks to consider.
Advantages of franchising
- The risk of business failure is reduced by franchising. Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
- Products and services will have already established a market share. Therefore there will be no need for market testing.
- You can use a recognized brand name and trade mark. You benefit from any advertising or promotion by the owner of the franchise – the ‘franchisor’.
- The franchisor gives you support: Usually as a complete package including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
- No prior experience is needed as the training received from the franchisor should ensure the franchisee establishes the skills required to operate the franchise.
- A franchise enables a small business to compete with big businesses, more so than an independent small business, due to the pool of support from the franchisor and network of other franchisees.
- You usually have exclusive rights in your territory. The franchisor won’t sell any other franchises in the same territory.
- Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
- You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
- Relationships with suppliers have already been established.
Disadvantages of franchising
- Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.
- The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market.
- You may find that after some time, ongoing franchisor monitoring becomes intrusive.
- The franchisor might go out of business.
- Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough.
- You may find it difficult to sell your franchise: you can only sell it to someone approved by the franchisor.
- All profits (a percentage of sales) are usually shared with the franchisor.
- The inflexible nature of a franchise may restrict your ability to introduce changes to the business to respond to the market or make the business grow.