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In Brief:

    • Franchises offer franchisees a strategic identity that is not only effective, but it also has a cumulative market impact.
    • Franchises offer the independence of small business ownership supported by the benefits of a big business network.
    • Franchisees typically don’t need business experience to run a franchise. Franchisors typically provide the training needed to operate their business model.
    • Franchises have a higher rate of success than start-up businesses.
    • Franchisors provide a developed way of opening and operating the business, and ongoing guidance, systems and assistance.
    • It may cost less to buy a franchise than start a business from scratch of the same type.
    • Franchisees may find it easier to secure financing.
    • Buying a franchise also comes with a set of issues and drawbacks.
    • Buying a franchise means entering into a formal agreement with your franchisor.
    • Franchise agreements dictate how to run the business, so there may be little room for change or creativity.
    • There are usually restrictions on where franchises operate, the products they sell and the suppliers they use.
    • Buying a franchise means ongoing sharing of profit with the franchisor.
    • Franchisors do not necessarily have to renew an agreement at the end of the franchise term.

The Pros of Franchising to a Franchisee

Franchises offer franchisees a strategic identity that is not only effective, but it also has a cumulative market impact. Corporate brand identities have proven success in the marketplace. Mega-brands like McDonald’s and Dunkin’ Donuts have spent millions on their branding and logos, and their franchisees get to take full advantage of it.

A quick list of some of the advantages of buying a franchise‚ include:

  1. Franchises offer the independence of small business ownership supported by the benefits of a big business network.
  2. Franchisees typically don’t need business experience to run a franchise. Franchisors typically provide the training needed to operate their business model.
  3. Franchises have a higher rate of success than start-up businesses.
  4. Franchisors provide a developed way of opening and operating the business, and ongoing guidance, systems and assistance.
  5. It may cost less to buy a franchise than start a business from scratch of the same type.
  6. Franchisees may find it easier to secure financing.

Detail is explained below:

  • Established Brand and Instant Name Recognition

Compared to establishing a new business, a franchised business – from day one – will possess an established brand.

The name recognition that comes with an established brand, as well as the franchisor’s system standards that all franchisees must follow, assures customers that they can enjoy the same quality of experience and products in all locations. Franchisees get the advantage of consumers knowing the franchise system’s products and services.

  • Established Business Startup

The most difficult part of owning a business often comes in the startup stage. Buying a franchise helps skip that. A franchised business benefits from established business systems and procedures that have been tested and proven in the marketplace.

The process of opening a privately owned business is complicated and daunting, especially for anyone getting into business for themselves for the first time. Franchisee’s benefit from the franchisor’s experience, established and tested business plans, operating systems, site locations, construction, point of sale and software and hardware systems, advanced training, established standards and procedures, equipment and inventory levels, and marketing strategies and procedures. 

  • Training and Support

Franchisees will benefit from the franchisors’ continued training and support.  This includes initial training and support that should be ongoing and extend to business operations and the continued development of products and services.

Additionally, a franchisee can network with other franchisees who have gone through the process of opening one or multiple locations and can offer their advice. A franchise system also provides multiple advantages related to operating experience once the franchisee’s location is up and running:. 

The multiple franchised locations in the system create increased purchasing power, which can result in lower costs for supplies, inventory, and other goods.

  • One obvious advantage that big businesses have over small businesses is their access to increased buying power. The franchise may buy large amounts of inventory and equipment on behalf of their franchisees, meaning you’ll obtain these important assets at a reduced cost.
  • Regional or national ad campaigns help draw in a bigger customer base to each individual location.
  • A franchise system can be flexible in trying new products or services by test-marketing in a few locations to see the impact on a limited scale before rolling it out to the entire franchise network.
  • Marketing and Advertising

Marketing and advertising can be one of the biggest expenses for any new business. It is tough to compete against other businesses without effective advertising, and effective advertising is expensive. Franchise systems offer national advertising campaigns and assistance and guidance.

  • Reputation and Legal Support

A franchisee enjoys the protected reputation of the franchisor. “Protected,” because there are protected by attorneys that take care of the inevitable issues like lawsuits, accidents, and labor issues. The reputation of a business is imperative – it is what breeds additional business and keeps patrons loyal – and this benefit coupled with legal protection is an incredible bonus not available to independent businesses.

  • Potential Access to Financing

The biggest barrier to starting a business is cost. Seeking financing is a common need for business owners regardless of whether they’re starting their own business or buying a franchise. SBA loans can be an option with franchising, because the SBA reserves a portion of their loan allotment specifically to franchises.

Franchise Sign

The Cons of Franchising to a Franchisee

Buying a franchise also comes with a set of issues and drawbacks. No business or business model is perfect.

A quick list of some of the disadvantages of buying a franchise‚ include:

  1. Buying a franchise means entering into a formal agreement with your franchisor.
  2. Franchise agreements dictate how to run the business, so there may be little room for change or creativity.
  3. There are usually restrictions on where franchises operate, the products they sell and the suppliers they use.
  4. Buying a franchise means ongoing sharing of profit with the franchisor.
  5. Franchisors do not necessarily have to renew an agreement at the end of the franchise term.

Detail is explained below.

  • Franchisee’s Must Abide By The Franchise’s Rules and Guidelines

The name recognition and systems that come with a franchise brand requires consistency, As a result it is imperative that all franchisees follow identical processes and maintain uniformity of the products so that each franchise location has the same look and feel to the customer or client.

Though you’ll have some autonomy in how the business operates, for the most part you’ll be required to follow the rules, regulations, system operations, and directives of the franchise. 

  • Ongoing Royalty Payments

Franchisees pay to franchisors royalty payments for using their name, products and system, and to contribute to marketing and advertising costs.

  • Contractual Agreements

Franchisors and franchisees execute contractual Franchise Agreements, which list all components of the relationships. Break any of those many requirements and a franchisee could lose their business altogether. Or, if a franchisee decides that it wants to close up and not be in this business anymore, then the process of closing up shop is much more difficult than if they were not a franchise.

The decision to buy into a franchise comes with many of the same considerations as starting any other business—a passion for the business, dollars needed to finance it, a team, the ability to confirm and stay organized, and much more. 

Potential franchisees need to decide if they can live with the cons—and take full advantage of the pros—before they buy a franchise.    

    

Callens Capital