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Franchise Business: Its Advantages and Disadvantages

Last Updated by Dev 15-Oct-2020

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An entrepreneur always dreams of one thing, that is owning a successful business and the biggest fear of entrepreneur is that there are thousands of roadblocks in starting a new business and the most difficult one is to enlarge a small business. So, what is the alternative to avoid so much risk? The answer is a franchise. A business franchise might be the best startup given today’s market competition and condition. So, today we will be discussing business franchise and its advantages and disadvantages. 

What is a Franchise?        

A franchise is basically an agreement between a franchisor and a franchisee where the franchisor is the original business owner who sells the rights to the franchisee to use its name, ideas and business model. It provides a business expansion opportunity to the franchisor whereas a franchisee gets the license to sell products or services under a well-established business name. It is a joint venture between both parties where both have something to gain.

Franchising

Franchising is naturally described as a marketing concept for the franchisor to expand its business to different locations. It provides benefits to both parties as the franchisor doesn’t have to look for locations to expand its business and put money to set new units. The franchisee gets the benefits of selling under the name of a settled business.

“You can’t do well unless your franchisees do well” – Richard Cole

As every coin has 2 different sides, the business franchise also has both advantages and disadvantages. So, let’s discuss both.

What are the advantages of a franchise business?

There are many advantages of a franchise that is the reason why so many entrepreneurs are interested in investing in a franchise business rather than start-ups. Buying a franchise is a quick way to start a business without risks and starting from scratch. A few important ones are listed down.

No prior business experience required

In almost any business, prior business knowledge is required to achieve success but with franchise business, no prior business knowledge is required. The franchisor can take care of it, they can provide a franchisee with all the training and support to run the business.

Higher success rate

With a recognized brand name and trademark, the success rate is always higher. Products and services from the franchisor will come up with an established market share.

Reduced risks

The risks associated with startups are too much whereas, with a franchise, your business will be based on a proven idea. Business failure risks associated with a franchise is very low as an entrepreneur can check the response of other franchisees related to that business before investing. The franchisor will also help franchisee if they are failing which reduces the chances of failure of the business. 

Easy financing available

Not every entrepreneur has the money required to start a business. It is known that banks or investors are more likely to loan money to an established business franchisee than to any start-up.

Less marketing required

One of the biggest advantages of a franchise is less marketing. A startup has to invest a lot of money just for marketing whereas a franchisee gets all advertisements in itself. The franchisor will itself do most of the marketing for you by letting customers know about the new franchise and even if not, the marketing required for a franchise will be very less as compared to any startup.

Exclusive rights

The franchisor will provide you with exclusive rights such as there will no other franchise of your franchisor in your territory. This reduces competition and increases the chances of success.

What are the disadvantages of a franchise business? 

There are many benefits but there are also drawbacks needed to be considered before going forward. It’s better to be cautious than to be sorry.

Restrictions

Buying a franchise will put you in a formal agreement with the franchisor. The franchisor will always put restrictions on how to operate the business. It will never allow you to run the business as you want because of its reputation. 

Influence of other franchisees

There will always be an influence of other franchisees on your business too. If other franchisees are not doing well, then it will also impact your business. However, the positive impact of other franchisees will be negligible. 

Profit-sharing

One of the biggest disadvantages of a franchise business is that the franchisees have to share a part of its profit with the franchisor. However, the part is very small in most cases but sharing something you earned is always a disadvantage.

Dictation

The franchisor will dictate everything from how to run the business to where to run it. A franchisor will never allow you to introduce new changes in your business which might be the demand of your market. A franchisor will act as a dictator and keep an eye on everything. 

Higher costs

The cost associated with franchisee might be higher than one thinks. Buying a franchise is not enough; an entrepreneur has to keep other expenses in mind to such as management service fees, hiring staff and others. 

The following disadvantages are associated with all the franchise businesses. So, an entrepreneur must consider and evaluate both advantages and disadvantages before buying a franchise.

Buying a franchise doesn’t guarantee success to any business and all the basic principles associated with a start-up apply here too. However, a franchise is indeed the simplest way to start a business. Franchising is a very flexible method and any business can be franchised that essentially provides the opportunity to grow the business. There are many types of franchise agreements between the two parties governed by different factors such as investment, strategy, operations and marketing, etc. here is the list of 4 basic types of franchise-related to different types of businesses.

Different types of franchise

Job Franchise 

This is basically a low investment type of franchise where typically one person buys franchisee and has to invest a very low amount. A wide range of services fall under this category from dry cleaning, cell phone accessories and repairing, shipping to coffee van, travel agency. For example, many apps sell their franchise to local shops so that when you order something from that app, you get fast delivery from that local shop. 

Product Franchise

The product franchise is basically based on the distribution of the franchisor’s products. The franchisor provides goods to the franchisee which they have to sell on its own. The product franchise sometimes also includes the manufacturing of products by the franchisee. Tire companies, small food chains, cars, bikes, etc. are the most common examples of product franchises.  

Investment Franchise

Investment franchise deals with large investment franchise businesses like Hotel chains, large restaurants etc. In an investment franchise, the franchisor usually provides a well-trained team to help the franchisee to start their business.  

Business Franchise 

This is the most common type of franchise we come across every day. When a normal person talks about a franchise, this is the type of franchise they refer to. In a business franchise, the franchisee gets to use the trademark of the franchisor. The franchisor provides a complete outlook on how to operate the business. Everything from fast-food chains, restaurants, gym franchise and others falls under this category.

Conclusion: Now, you have understood everything related to a business franchise. A successful entrepreneur always goes through all the aspects of something before investing in it. Franchise business may sound interesting to everyone but one should always consider the brand and its reputation in the market before setting things in motion. 

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