Pros and Cons of Franchising Your Business
Anyone who is planning to scale or buy another business may want to franchise. This option focuses on expansion, growth, and opportunity. Like any important decision, there are pros and cons of franchising a business. Franchising may not be the best choice for every person, so it is vital to understand the risks and benefits before starting the process.
Difference Between Franchisor and Franchisee
Understanding the difference between the terms “franchisor” and “franchisee” can help a business owner determine whether franchising is the best option for his or her business.
A franchisor is an individual who wants to grow and scale a business by establishing a franchising opportunity. McDonald’s, for example, offers the licensing and rights to open locations across the country under its brand. The franchisor sets the rules for using the brand, provides support for the locations, and adheres to specific operational systems
A franchisee is a person who wants to buy a franchise. This individual wants to join an established brand rather than creating a new one. Franchisees invest their time, capital, and managerial efforts into opening and operating the new location
What Are The Advantages of Franchising?
For existing brands with a track record of success, franchising could be the next step for growth. Franchising may be a good move when business owners want to scale or grow their brand by opening new locations. Some of the advantages of franchising include:
Growth and Expansion
Some business owners open additional locations in more traditional ways, such as taking on partners or investing more of their capital. However, franchising allows these businesses to sell franchise opportunities to interested parties known as franchisees. While franchisors provide resources to operate the new locations, franchising creates a relationship that does not carry the same risks as a joint venture.
Unlike a joint venture, federal and state laws regulate franchises. According to the United States Small Business Administration, all franchises must abide by the Franchise Disclosure Document (FDD). These laws and regulations help protect the franchisor and franchisee from legal ramifications.
Experiencing financial burdens when growing a business is common. However, franchising offers owners unit-level expansion, as the franchisee provides the capital for the new location. All franchisees must pay an initial fee to join the network and invest their own money in developing the property and opening the location.
Although finding the right people can be a challenge when opening a new location, franchising can solve that problem for the franchisor. The franchisee must onboard new team members and management for the new establishment. Because hiring and training employees is left to the franchisee, he or she will want to find and retain high-quality staff members to ensure the success of the new location.
When the number of locations operating under a brand increases, the franchises can leverage their supply chains. This means that the franchisor can negotiate better supply prices for more consistent and larger orders. Also, becoming eligible for incentives and rebates could benefit both the franchisor and franchisee.
When the franchise grows, the franchisor’s cash flow, assets, private equity, and revenue streams could have a higher valuation. While many franchisors will not want to sell their franchises in the early stages, an incredible franchise system could be sold at any time.
According to the Federal Trade Commission, certain rules help to weigh the benefits and risks of franchising. There are many pros and cons of franchising your business. If you have a company that you are considering expanding through franchising, an experienced business attorney, such as the legal team at Amini & Conant, may be able to help.
What Are The Disadvantages of Franchising?
While franchising might have endless advantages, there are some disadvantages to consider before making a final decision. The cons of franchising include:
Initial Capital Investment
Whether someone is starting an independent company or a franchise, he or she needs capital to start. Franchisors often invest their own capital to get their new franchises off the ground. These initial investments range from $25,000 to $100,000. While some individuals believe that franchising is a fast track to pulling in more revenue, that is not always the case. Franchisors might not see a profit for a few years when starting a franchise.
Franchisors should expect to invest their own capital in developing an initial sales marketing plan for franchisees. Franchising has many initial costs, including those for hiring public relations firms, marketing agencies, and legal help. After the second year, the franchisor may need to invest more capital to build and support the brand. Over time, the franchisor can build a team and develop a franchise system. However, the first two years may require more capital for the initial investments.
Loss of Control
Franchising has some trade-offs when a franchisor allows others access to the brand he or she has created. Unlike with independent business operations, franchisors may lose some control over their franchised businesses. While a solid FDD and franchising agreement can help the franchisor retain brand control, there could be times when new or existing franchise locations are non-compliant. Setting guidelines, establishing an approval process for the activities of franchisees, and outlining operational territories may help to give a cohesive system to the franchise.
All businesses require some time commitment from owners, especially when franchising. All franchisors should plan to invest energy and time into developing the franchise. They will also have to find time to network with franchise brokers, build the team, market the brand, and stay in legal compliance.
Franchisors need to remain compliant with laws and regulations. Those franchises that fail to follow state or federal rules may become liabilities. By working with an experienced legal team, franchisors may be able turn those liabilities into assets.