Reading time: 5 minutes

Franchising can be a great way to expand your business with minimal risk. However, depending on your business, there can be both positives and negatives to franchising. Accordingly, it is important to engage experts to discuss your business and growth plans. This article will set out the pros and cons of franchising your business.

Snapshot: Pros and Cons of Franchising

Pros

Cons

Low Capital Output Upfront Cost
  • The new locations are financially easy to establish as the franchisee will pay all costs
  • Allows for rapid expansion because multiple locations can be opened at the same time
  • Could involve a higher upfront cost to the franchise if you do have aspects in place such as trade marks, systems and processes, an operations manual, business structure and franchise documents
Minimised Growth Risk Decreased Revenue
  • Rapid expansion can generate high returns
  • Relatively low risk and expense for you when compared to hiring more employees and taking on more stock and leases
  • You may potentially give away significant profit to franchisees
  • Franchisees may become unwilling or unable to pay due to poor performance
Access to Talented Franchisees Decreased Control
  • Incentivises the franchisee to manage the store well
  • Franchising attracts talented and hardworking people because they can run their own business
  • Franchised locations may be harder to oversee and control
  • Each franchise is an independent business and may have different operation standards
Larger Brand Power Tougher to Innovate
  • Allows for collective efforts to increase brand recognition
  • Collective marketing funds and experts within the franchise business can create effective marketing and brand loyalty
  • Systems and processes are established and set out in the franchise agreement and operations manual
  • While it is possible to alter the operations manual, more substantial changes to the business can be challenging


Low Capital Output vs. Higher Upfront Cost

Franchising allows for rapid expansion without the need for loans or dispensing with equity. The initial franchise fee also provides a cash injection into the franchised business. For each new location that opens, the franchisee will cover all the expenses.

These include:

  • lease payments;
  • fit out;
  • training; and
  • legal fees.

One of the most significant benefits of franchising is the ability to open new locations which provide returns without further risk. However, establishing a franchise system can be an expensive process.

Some of these considerations are:

Overall, depending on the services required, setting up a franchise can range from $15,000 to $150,000.

Minimised Risk vs. Decreased Revenue

The financial risk of establishing new franchise locations is low because the franchisees fund the venture. There will not be a significant financial impact on the overall business if the franchise location fails. On the other hand, failing locations reflect poorly on the brand.

However, you would gain a more substantial portion of the revenue if you opened these locations yourself. If a franchisee opens a location, a franchisor can earn 8-12% of revenue. If you opened these locations yourself under a corporate model, you could earn 100% of the revenue.

Decreased Control vs. Incentivised Managers

A disadvantage of franchising is that you have less direct control over how the business is run. The franchisee simply has to follow the franchise agreement and refrain from breaching it. This is less control than you would have over an employee who you can ask to do specific tasks. On the other hand, you can choose franchisees who are skilled business people. The screening process allows you to enter agreements with appropriate individuals.

Financially, franchisees will also have a significant incentive for the business to do well. This desire for success will benefit the entire franchise.

Larger Brand Power vs. Innovation

The establishment of multiple locations increases general brand power and awareness. In addition, marketing will be shared by you and the franchisee.

Usually, in franchise systems, there will be minimum marketing spending per franchise. Franchisees will have to contribute to a communal marketing fund (2-4% of revenue).

As a result, each location is promoting the brand and you are using their marketing team to promote the business effectively. This can allow the franchise to create a large following of loyal customers.

However, a large number of franchisees can make it difficult to innovate or adapt to competitors. Anything which is set out in the franchise agreement would need to be negotiated with each individual franchisee to be changed. Franchise agreements will allow for rebranding of logos and symbols. However, if the franchise needs to change more than just its look, this may be difficult.

Key Takeaways

Overall, take the time to evaluate the pros and cons of franchising your business. While franchising is a great way to expand your business with limited risk, it can be difficult to control franchisees and innovate quickly. There are many factors which should be carefully considered to determine if franchising is right for your business.

If you would like to learn more about franchising, get in touch with LegalVision’s franchising lawyers  on 1300 544 755 or fill out the form on this page. You can also have a look at our Franchisor Toolkit, which explains a number of the aspects of franchising.

Webinars

Rogue Directors and Business Divorces: How to Remove a Director

Thursday 28 April | 11:00 - 11:45am

Online
Removing a board director is not simple. Join our free webinar to learn how to handle rogue directors. Register today.
Register Now

Employment Essentials for Tech Businesses

Thursday 5 May | 11:00 - 11:45am

Online
Protect your tech business and your employees by understanding your employment legal obligations. Register for our free webinar today.
Register Now

How to Protect and Enforce Your Trade Mark

Wednesday 11 May | 11:00 - 11:45am

Online
Protect your business’ brand from copycats and competitors. Register for this free webinar to learn how.
Register Now

Corporate Governance 101: Responsibilities for New Directors

Friday 13 May | 11:00 - 11:45am

Online
If you are a new company director, join our free webinar to understand your legal compliance obligations. Register today.
Register Now

How Franchisors Can Avoid Misleading and Deceptive Conduct

Wednesday 18 May | 11:00 - 11:45am

Online
Ensure your franchise is not accused of misleading and deceptive conduct. Register for our free webinar today.
Register Now

New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

Online
If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Online
Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Day in Court: What Happens When Your Business Goes to Court

Thursday 2 June | 11:00 - 11:45am

Online
If your business is going to court, then you need to understand the process. Our free webinar will explain.
Register Now

How to Manage a Construction Dispute

Thursday 9 June | 11:00 - 11:45am

Online
Protect your construction firm from disputes. To understand how, join our free webinar.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Online
Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer