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.

Matthew DeRusha
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