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Aligning with an established brand offers many advantages. It provides the opportunity to run your own business with the support of a franchisor. Moreover, you can access an established system to avoid difficulty building a brand from scratch. However, there are several disadvantages to the franchising business model. This article will explore some pros and cons of purchasing a franchise.
Advantages
Self-Employment
One of the main advantages of buying a franchise is being self-employed while still having a franchisor’s support. When you own a franchise, you work for yourself. However, this is offset by having specific rules that you must adhere to relating to business operations, branding and quality standards.
Brand Awareness
A significant benefit of purchasing a franchise is instant access to a successful brand. This allows you to reap the benefits of that brand’s awareness and reputation with minimal effort. Appealing to an existing, loyal fanbase makes it much easier to increase revenue in the early stages. Brand awareness also makes securing loans from banks and land contracts with suppliers or distributors easier, making setting up your business easier.
Skip the Startup Stage
Another benefit of purchasing a franchise is skipping the initial stage of establishing the business. Raising capital or debt to fund a venture is often the most challenging part of a business venture. However, franchising allows you to skip this step. Accordingly, buying a franchise is much less risky than setting up your own business from scratch.
Support From the Franchisor
A franchisor is invested in your success as a franchisee. Thus, franchisors provide support and training to their franchisees to ensure you comprehensively understand their business model and how the stores operate. Consequently, you can buy a franchise with little to no business experience. Instead, their years of experience will help you manage your business successfully.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
Disadvantages
Upfront Costs
One major drawback of buying a franchise is the upfront costs involved. This differs from franchise to franchise but is often relatively expensive.
Despite this, these initial upfront costs are usually offset when you remember that you are purchasing a successful business model. Further, it is much easier to seek a loan from a bank when buying a franchise. Again, this is because a franchise generally has a successful business model and is considered a safe investment.
Ongoing Costs
Another downside of purchasing a franchise is the ongoing fees you must pay the franchisor. This includes a royalty payment typically determined by a percentage of your sales revenue. Other ongoing fees may consist of:
- training costs;
- contribution to a marketing fund; and
- legal costs associated with renewing your franchise agreement.
It is essential to factor in these ongoing costs to determine if a franchise is right for you.
Abiding by the Franchise Rules
You must abide by the rules established by the franchise agreement. Although you have some opportunity to negotiate these rules before entering the agreement, it is usually the franchisor who establishes them. You must strictly adhere to predetermined business operations and instructions as a franchisee. However, as a small business owner, you may find that this stifles your creativity and flexibility.
Non-Ongoing Contracts
Franchising agreements are only in effect for a certain period. At the end of this period, the franchisor may decide not to renew your contract. For some, a temporary contract may be an advantage. When the contract ends, you can use your experience with the franchise as a springboard to starting your business.
Continue reading this article below the formKey Takeaways
Aligning yourself with an established brand offers many advantages. It provides the opportunity to run your own business with the support of a franchisor. You can also access established systems to avoid difficulty building a brand from scratch. There are also a number of disadvantages to the franchising business model despite the benefits. Some of the advantages of buying a franchise include the following:
- allows you to be self-employed;
- brand awareness;
- skip the start-up stage; and
- support from the franchisor.
On the other hand, some drawbacks of buying a franchise include:
- upfront costs;
- ongoing costs;
- the requirement to adhere to the franchise rules; and
- non-ongoing contracts.
If you need assistance understanding if buying a franchise is right for you, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Key Takeaways
Franchising is a business model involving a franchisor assigning a franchisee the right to market and distribute goods or services under their brand. This is a rapidly growing business model across various industries.
Some of the advantages of buying a franchise include being self-employed and accessing an established brand. Buying a franchise also means you can skip the start-up phase and receive support from the franchisor. On the other hand, some drawbacks of purchasing a franchise include the upfront and ongoing costs. Further, there is also a requirement to adhere to franchise rules and non-ongoing contracts.
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