In his previous article, Advantages and Disadvantages of Franchising, Tahir Basheer discussed franchising specifically from the franchisor (the brand owner)’s perspective. But what about guidelines for the franchisee?
To become a franchisee, one must come to a franchise agreement with the franchisor, often paying a lump sum up front and incurring a number of liabilities. It is not a decision to be taken lightly. Here I discuss some of the key pros and cons:
Advantages of franchising from a franchisee perspective
Accessibility and support
Franchisees will benefit from the contacts and expertise of the franchisor and be assisted with site selection, lease negotiation, site development etc. and be provided with formal training programmes and operating systems. Franchisees will also benefit from the ongoing research and development carried out by the franchisor.
Reduction of risk
Successful franchises will have a proven track record, so franchisees can be confident that the main problems with the business will have been addressed. Therefore, subject to effective input, the risk of business failure will be significantly reduced. This is reflected in the fact that far fewer franchisees fail within the first years of business compared to other new businesses.
Finance is likely to be more accessible to a franchisee than someone setting up a business independently. A bank will consider the reputation of the franchisor and the fact that many other franchisees may already have a deal in place with them.
Economies of scale
A franchisee will often be a small business, but it can exploit the franchise network to buy stock, equipment etc. on more favourable rates.
The franchisee will benefit from the extensive advertising of the overall franchise business. This advertising, often on a national and international scale, is likely to increase the profitability of the franchisee.
Disadvantages of franchising
Franchisees will be subject to certain controls and restrictions by the franchisor as set out in the franchise agreement. Although this is a key aspect of a franchise, many franchisees will see themselves as independent businesses and may find the lack of autonomy difficult. You need to tow the party line. The level of control differs between franchisors. The franchisee is also at the mercy of external events which affect the franchisor. If for example, the franchisor suffers negative publicity then this will have a knock-on effect to the franchisee.
Royalties and markup
Franchisees will have to pay royalties to the franchisor and may have to mark-up the goods or services received from the franchisor or the franchisor’s supplier.
If the franchisor becomes insolvent then so will the franchise itself.
There will usually be a set of procedures for the franchisee to follow, including getting the franchisor’s approval of the buyer, and the franchisee will usually have to pay a fee to the franchisor as outlined in the franchise agreement. The franchisee may also be subject to the restraint of trade restrictions after the sale or termination.
Unfortunately, many of the larger brands have standard franchise terms that they will insist on including in any franchise agreement, so a perspective franchisee may find it hard to negotiate. However, it is important to carefully consider all aspects of the franchise agreement to avoid overly onerous or unrealistic terms.