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Should I become a franchisee?
Should I become a franchisee?
By Nick James on July 13, 2011
Thinking it’s time you took control of your career by becoming your own boss by starting your own business or buying a franchise? There isn’t a better time to take control of your career than now and if you’re a little confused over which path you want to take whether it is to start your own independent business or buy in to a proven franchise system, the best and first thing you should do is look at the pros and cons.
Take in to consideration that there are always calculated risks with any form of business and it is foolish to rush in without knowing they are however as the saying goes with franchising it’s ‘being in business for yourself but not by yourself’ and you can’t beat having a support network behind you!
ADVANTAGES
Reduced risk
The greatest benefit to a franchisee is the reduction in his risk of business failure. As an ethical franchisor will have tried and proved the business concept in the market place prior to franchising most of the obvious problems should have been solved and therefore the risk to a franchisee minimised.
In Australia, less than 4% of franchisees fail within the first three years as compared to over 95% of new one off independent business start-ups.
Economies of scale
Franchising enables a small business to compete effectively in the market place and take advantage of the economies of scale. A franchised network can buy products on more favourable rates than an individual small business which can offer a significant advantage over smaller independent competitors.
In addition the products equipment, system and services which have been market tested will already have a degree of consumer acceptance.
Skilled management
The franchisee has access to quality training and assistance to set up the business from day one, thereby avoiding many of the pitfalls and mistakes of independent businesses setting up from scratch. The ongoing support provides a valuable resource for franchisees often allowing them to do much better in a recession than other businesses.
Advertising
As discussed above, a franchisee is often required to pay a contribution towards an advertising fund which is usually expressed as a percentage of his gross revenues (commonly 2-5%). The pooling of the resources of other franchisees and any contribution from the franchisor allows a franchisee access to extensive advertising whether in his own territory or nationwide. This increases the brand awareness and usually the profitability of his business.
Financing
A franchisee can take advantage of the name and reputation which has been built up by the franchisor. This can often reduce the lead time in making a business successful which in turn reduces the franchisee’s working capital requirements.
Finance is usually more readily available to franchisees than to those setting up in business on their own account. Usually franchisors will have negotiated with one of the major lenders in the franchising industry certain rates upon which a franchisee can obtain finance and a ratio of loan to capital.
In some of the more substantial franchised networks these rates can be extremely favourable. As a result a franchisee is often required to invest less of his capital because of the financier’s willingness to assist as a result of the proven success of the franchised concept.
Exclusivity
In many cases franchisees are given exclusive territorial rights which in effect gives them a monopoly over the area allocated in respect of doing business under the trade name.
DISADVANTAGES
Control
Franchisees, in essence perceive themselves as independent businessmen and owners of their own businesses. They are, however, subject to control and regulation by the franchisor in the form of the franchise agreement and operations manual which they will not necessarily appreciate.
A franchisee could argue that were he to set up in business independently he would not be subject to the same type of restrictions. Whilst on the face of it this seems true, in practice independent small business owners are often restricted in other ways through commercial considerations. Powerful customers and suppliers, strong local competition and financial constraints all impose less obvious but equally important restraints and can pose far more of a burden than an ethical franchise agreement.
Reputation
The franchisees reliance upon the power of the franchisor’s trade name can prove to be a major disadvantage where the franchisor through mismanagement or neglect allows the brand to be called into disrepute. Any failure of the franchisor has a knock-on effect to its franchised network.
Whilst franchisees share in the benefits and success of the franchisor they also share in its failures. This is equally the case where other franchisees perform in a manner that calls the reputation of the franchised network into question.
Products
Often a franchisee is tied exclusively to the supplier of the product and is restricted from selling any similar or other products in the business. In such cases the franchisee is often required to stock a specific range of products and introduce new or additional products that may subsequently not sell as well. A franchisee’s desire to expand can often be frustrated by the narrow-mindedness of the franchisor.
Right to sell
One of the most important considerations for a franchisee is the value that can be realised from its business in the future. Invariably the franchisee will not have the unfettered right to sell his business to a third party. Such a sale will be subject to certain pre-conditions being fulfilled. This consent can never be taken for granted. In addition a franchisor may impose a transfer free on such sale and an introducer’s fee where it has introduced the prospective purchaser.
These can be significant and obviously reduce the realisable value for the business. The franchise agreement usually provides that the franchisee does not own any part of the intellectual property rights of the franchisor i.e. the trade name and trade secrets or any of the goodwill attached to those rights.
Dependence
In certain cases a franchise can become over-dependent upon the franchisor’s support to the extent that he cannot make an independent decision. In such cases the franchisee has in practice become a disguised employee.
Other disadvantages to a franchisee relate mainly to the type of franchise agreement which they are being offered. In many cases the expectations of success are linked to minimum performance criteria which can be set unrealistically so that a franchisee consistently fails. This not only demotivates a franchisee but also impacts on his right to renew the agreement at the end of the first term or to sell it to a third party.
A franchisee is not granted the specific right to terminate his agreement whereas a franchisor invariably has a long list of events upon which he may end the relationship. This one sided approach can put a franchisee into constant fear of termination which again has a negative impact on the business.
ADVANTAGES TO THE CONSUMER
In theory, a consumer should benefit greatly from a franchised business because he will be dealing with an owner and not merely an employee. The service should therefore be personalised, effective and result in great customer satisfaction.
As the purpose of a franchised network is to establish uniformity amongst all its franchisees a consumer should be able to expect the same standard of goods or services in different parts of the country from members of the same network and be able to rely on after sales services and promises. In many franchised networks a franchisee will honour the commitments and obligations to a customer of another franchisee should he be required to service such customers. A consumer dealing with a small independent business would not have the same comfort where the business goes into liquidation.
DISADVANTAGES TO THE CONSUMER
A highly successful franchise can reduce or even eliminate the competition and choice for the consumer. This is particularly the case where a franchisee has an exclusive territory. Where a customer is dissatisfied with the service or product obtained from that particular franchise there will be no alternative outlet to go to. This is particularly a problem where the customer has a personal complaint against the franchisee.
There is no doubt however that a well structured and managed franchised operation can benefit all concerned. It offers opportunities for small businesses to compete with the big players and even on an international stage.
The growth of franchising, particularly in certain sectors of the market place such as food, home services, real estate and retail, is testament to the success and benefits that it can bring to both franchisors and franchisees alike, as well as its power in fostering customer satisfaction and loyalty.