Advantages & disadvantages of buying a franchise
There are many advantages to buying a franchise business but there are also a number of drawbacks too. Here are some of the key things to consider before entering into a franchise agreement.
Because the franchise’s business formula has been proven to be effective, often in different locations and markets, entering into a franchise agreement is less of a risk than starting a new independent business.
According to industry research conducted by the British Franchise Association (BFA), less than 1% of franchised businesses close every year due to commercial failure and 93% report profitability. Compare this to the fact that fewer than 50% of UK start-ups do not make it beyond five years (GOV.UK, 2019) and one in five start-ups fail to make it past their first year (Telegraph, 2019).
Attracting customers and employees can be hard for a new business. However, by buying into an existing franchise, you get access to a loyal base of customers and a potential pool of keen employees from day one.
A franchisee will benefit from any national or local marketing undertaken by the franchisor. This will often include channels that a new business owner would not normally have access to, such as national press, trade publications and TV.
Although highly advantageous, this coverage will usually incur additional marketing fees levied on the franchisee. In which case such costs will always be laid out in the franchise agreement.
Support and training
With the backing of a larger, established organisation, franchisees are able to take advantage of franchise training and support, enabling them to hit the ground running. This training usually covers everything from product knowledge and customer service standards to VAT, bookkeeping and human resources.
In a recent survey of franchisees carried out by the BFA, the ‘support provided’ by franchisors came top of the perceived benefits of being a franchise.
Because relationships with suppliers have already been established by the franchisor, this provides the franchisee with greater negotiating power and bulk purchasing options which can result in significant savings not normally available to a new business owner.
Research and development
Franchisors usually dedicate significant resources to research and development, helping franchisees to fully realise their growth potential. Successful franchisors will constantly be looking to innovate and introduce new ideas for improving their business, and as part of the network you will reap the benefits of this. This R&D could include new product lines, more streamlined processes and market research and testing.
Because franchises have a proven track record of success, banks are more likely to lend money because your projections will be based on experience and reality. In addition, you are more likely to receive favourable franchise funding terms, especially if you are entering into an agreement with a well-established franchisor who may have already negotiated terms with lending institutions.
Lack of control
When you enter into a franchise agreement, you surrender a great degree of day-to-day control and decision-making to the franchisor as well as a percentage of your revenue. Restrictions on what you can and cannot do may mean that you cannot pursue potentially lucrative business opportunities that fall outside of your franchise agreement.
Devaluation of brand
No matter how well you run your own business, there is always the risk that another franchisee may damage the reputation of the franchise brand. For example, if there is an outbreak of food poisoning at another restaurant owned by a franchisee in your network, the resulting news headlines and social media outcry may harm your reputation, even if your hygiene standards are exemplary.
Failure of the franchise
There is also little you can do if the franchisor - or other franchisees - fail. Such an eventuality could have damaging consequences on your business and the rest of the network.
Restrictions on selling the business
You will need to seek approval from the franchisor in order to sell the business. Although permissible in the franchise agreement, you will naturally be governed by the terms and conditions of the contract which will be far less flexible than you would experience with the sale of an independent business.