Owning your first business can be daunting with much uncertainty on the horizon. Franchises offer the unique opportunity to skip the fragile start-up phase of a new or rebranded business. Franchises can be very enticing for anyone looking to enter entrepreneurship with no prior experience. They take the guess work out of business ownership with pre-established frameworks in place and all training provided.
While this may seem like the ideal pathway to entrepreneurship, franchises are not without their faults. For anyone seeking creative freedom, franchises may not be the avenue for you. There is little to no room for negotiations with how the business operates. The frameworks are rigid, and the franchise agreements grant little independence to franchisees. Furthermore, franchise fees can be costly and often outweigh the financial benefits of entering a recognised operation.
This blog will outline the pros and cons of purchasing a franchise to help better inform your decision as a new entrepreneur.
Financing – Undoubtably one of the biggest hurdles when starting or purchasing a business is financing. Many lenders won’t approve loans they deem to be high risk. With the high failure rate of new businesses, it can be very challenging obtaining approval for a loan. Franchises are seen as a lesser risk due to their proven success and refined infrastructure. Applying for a loan to purchase a franchise may prove to be much easier, especially for new a business owner.
Skipping the Start-up Phase – The start-up phase of a business is the most demanding and uncertain time for business owners. Writing a business plan, conducting market research and product testing as well as building a customer base takes a significant investment of time, energy and money. According to the Australian Bureau of Statistics, more than 60% of small businesses fail in the first three years of operation. These statistics can be daunting for those aspiring to start a new business, especially those without prior business management experience.
Franchises pose the opportunity to skip the start-up phase and learn firsthand how to manage a successful enterprise. All the work and research has been done for you, allowing you to focus on the day-to-day operations. The training provided by franchisors is thorough and ongoing meaning the new franchisee is not required to have any prior business experience. Franchises can be a great steppingstone to entrepreneurship, allowing you to build the confidence and knowledge required when starting a new business.
Established Brand and Following – It is apparent that customers are the backbone of any successful business. Building a customer database can be one of the most challenging aspects of business ownership and management. While this is best done through advertising, it can be costly without any guarantee of a return. Entering a franchise allows you to tap into a vast pre-established market who know and trust the brand.
Brand recognition is a very difficult goal to reach and can take years of marketing with high expenditures. Franchises are highly recognisable with many recognised international. This recognition along with trust in service makes franchises a popular option for both locals and international travellers.
Purchasing Power – One of the highest expenses of most businesses is their cost of goods (COGS). Franchises will often purchase in bulk on behalf of their franchisees giving you the benefit of reduced COGS. Alternatively, the franchisor will connect you with suppliers. These suppliers may offer you products at a reduced cost due to their long-standing relationship with the franchise.
Franchise Costs & Fees – The investment costs of purchasing a franchise can often be much higher than the costs of purchasing an independent trading business. This is due to their pre-established reputation and customer base. Although, this inflated cost may not always be warranted, do some research into the current performance of the franchise, specifically in the area you will be operating.
Along with a hefty purchase price, additional fees for transfer of ownership and training may apply. Ensure you read the franchise agreement thoroughly and determine which costs will apply to you and which costs will be covered by the previous franchisee.
Ongoing fees can be a significant deterrent for many when considering entering a franchise. These may include franchise or royalty fees for using their name and infrastructure. Additionally, you will have to contribute to marketing and advertising costs at the franchisor’s discretion.
Rigid Frameworks – While franchises allow you to skip the uncertainty of starting a new business, they provide a set of frameworks that can be extremely rigid. When entering a franchise, you must sign a franchise agreement outlining your obligations and limitations. Franchise agreements do not allow for much creative freedom. You may be permitted some independence in the day-to-day operations, but any significant changes will need approval from the franchisor(s).
Accountability – As an independent operator, you have the freedom to make your own business decisions. If you chose to close shop for a period of time, you are within your rights to do so. However, for franchisees, they must abide by the rules and regulations outlined in their franchise agreement. If a franchisee breaches their contract, they may be subject to serious implications including fines or even a forced termination of contract.
Shared Reputation – Although there are benefits to entering a brand with a pre-established and shared reputation, it is not without its downfalls. It does not matter how well you operate your franchise, if there is a scandal involving the brand, it will impact your business as well.