Franchising: the pros and cons
The term ‘franchising’ has been used to describe various types of business relationships but in its most common form, franchising is the granting of a licence by one person (the “franchisor”) to another (the “franchisee”), under which the franchisee is entitled to trade as their own business, under the brand of the franchisor, following a proven business model.
A franchise arrangement will usually have the following key elements:
- The franchisee uses the name, trade marks and other intellectual property of the franchisor to run its business under the brand of the franchisor.
- The franchisee follows the franchisor’s business model, usually set out in the form of an “Operations Manual”. This typically includes instruction on how the business should be set-up, what branding can be used and how the business should be run day-to-day.
- The franchisor retains the right to exercise quality control over the franchisee in order to protect their brand.
- The franchisee makes payments to the franchisor in the form of a franchise fee.
Of course, the specific arrangements can vary significantly on a case-by-case basis.
What are the pros and cons of franchising for a franchisor?
As with any type of business relationship, there are always a ‘risk vs reward’ analysis that needs to be done. From a franchisor’s perspective, here are some of the main pros and cons to franchising your business:
- Business growth – it can be a faster and more cost-effective way to grow your business as the franchisee will take on most of the initial labour and start-up costs.
- Brand development – the more franchise outlets you have and the more marketing that is carried out for the brand, the bigger your brand will become.
- Motivation and commitment – a franchisee will typically be more motivated in the success of the business than employees will be as they have a vested interest in the business succeeding.
- Costs – the franchisee finances their own franchise outlet and while they collect the income, you will likely be receiving a franchise fee plus possibly some royalties/mark-ups on products.
- Time – franchising can take a lot of time investment not only in the initial setting up of the model but also in supporting franchisees. You will also have to dedicate sufficient time and resources in ensuring you attract the right franchisees.
- Control – franchisees cannot be managed as closely as employees can and so there is some element of control taken away from the franchisor.
- Reputation – a franchisor is relying on its franchisees to uphold the reputation of its brand. Selecting one wrong franchisee has the potential to ruin that reputation.
- Upfront investment – the time and money required in the initial stages can be significant, particularly if a pilot operation needs to be tested first (as is often the case).
What are the pros and cons of franchising for a franchisee?
The same applies if you are a franchisee looking to take on a franchise business. From the franchisee’s perspective, some of the main pros and cons are:
- Brand recognition – when you start a business from scratch, you have to invest a significant amount of time and money growing your brand. With a franchise business, your brand is already well established and likely to have an existing customer base.
- Business plan – in addition to the brand recognition, a franchise comes with a ready-made business plan that has already proven to be successful.
- Support – unlike starting your own business, franchising comes automatically with support from the franchisor and you’ll have continual access to this support to guide you through the process of owning and operating a business.
- Limited creative opportunities – when you start your own business, you have complete freedom to operate it the way you choose. However, with a franchise, you will have to adhere to the rules set out by the franchisor and will have limited scope for innovation and creativity.
- Lack of control – the fate of your business isn’t entirely in your control. Franchisees benefit from the brand recognition of the company whose franchise they buy into. However, they are not solely in control of the reputation of that brand and this leave them vulnerable if a bad franchisee ruins the brands reputation.
- Cost – franchise start-up costs can be high and in addition, you will be required to make ongoing payment to the franchisor throughout the term of your franchise.
Our Commercial team are experienced in dealing with all types of franchise arrangements. Whether you are a franchisee or franchisor, if you are interested in finding out more then please do not hesitate to contact a member of our team.