On balance, when you decide to invest in a franchise opportunity with a mature, well-designed and managed franchise system, the advantages outweigh the negatives. It's a great way for you to become a business owner when you have never taken that plunge before and haven’t a clue how to get started. But understanding if franchising is right for you is essential, and for those individuals who need to flex their entrepreneurial muscles and make all the decisions on how their business should be operated, franchising is generally the wrong choice.
Even when you decide that franchising may be right for you, understanding the advantages and disadvantages of becoming a franchise is important.
Advantages of Franchise Ownership in a Mature System
Your ability to succeed in franchising is directly linked, to a great extent, to the capabilities of the franchisor selected and the performance of the other franchisees that will be sharing the brand with you. Immature or emerging franchisors may house outstanding ideas, but with inexperience often comes a lack of capital and lack of adequate support. While there are certainly significant benefits that may come with selecting a new franchisor, this article will focus on a more mature franchise offering. In general, the advantages found in franchising include:
Brand Recognition and Acceptance:
There is a certain level of quality and consistency that the public has come to expect from any branded business – including company-owned and franchised locations. There is a comfort and the perception of less risk when shopping for products and services in well-regarded chains. After all, under a branded system the public has come to expect that each location will look the same, have the same policies and procedures in place, have similar operating hours, pricing, products, services, menus, and customer service. Regardless of whether that brand’s products and services are superior or mediocre, there is generally an audience willing to shop there because the products and services meet their unique needs and they can rely upon consistency from location to location, regardless of the market.
An Existing Customer Base
Don’t accept a “poll of one.” We have a very successful client whose father started the business over fifty years ago, and the sons who acquired the business from their father simply will never eat the food. Whether you like or dislike a product or service is not important – it’s what your customer likes and dislikes that is critical.
Consumers understand the level of quality and price they desire and tend to shop at branded locations that satisfy this need. This leveraging off of the existing customers for the brand, frequently created by other franchisees in the system, enables franchises to compete with established local independent operators and against larger franchised and non-franchised competitors in the market. Being part of a well-regarded franchise system may also bring with it the advantage of system-wide accounts developed over time by the franchisor. For some products and services, larger enterprises look for solutions to the product and services needs and franchise systems can often fill that bill.
Helping You Get Started
Well structured and managed franchise systems provide you with tested operating systems, site selection, and development assistance, tested store designs, construction programs, reduced equipment costs, initial and advanced training for management and staff, operations manuals, marketing, and advertising programs, and the other necessary support required to successfully launch your business.
In addition, you get support from your franchisor when you open and have a network of other franchisees who have been in your shoes and can also be of assistance.
Other Ongoing Benefits
This includes the type and frequency of communications, as well as the level of headquarters and field support the franchisor provides to their franchisees. Also, most mature franchisors do a great job at ensuring their franchisees benefit from the purchasing power of the entire franchise system; obtaining inventory and supplies at a cost lower than your competitors can be a major benefit.
Marketing Power of the Brand
Professional marketing is important — delivered in the right way and with the right message. By consolidating some franchisees’ adverting budgets into a collective Brand Fund, franchisors are able to develop professionally designed point-of-sale marketing materials, advertising, grand-opening programs, and other marketing materials that independents could never afford.
Having your brand own a market is a powerful advantage over the competition. By levering the combined spending power of the franchise system on advertising, and then coupling that pent-up consumer demand with targeted strategic growth by adding new locations in a market, critical mass can be achieved. Having sufficient locations in a market to create critical mass squeezes out competitors because your brand is so convenient for customers to access.
With critical mass and a well-recognized brand comes a much more attractive place where people want to work. Also, many local franchisees keep tabs on which fellow franchisees are looking for good employees and when the opportunities arise, they often share those applications and even share employees. With the advent of the Affordable Care Act, managing labor costs through better scheduling tools and networking with other franchisees on labor issues are also becoming of significant importance.
Disadvantages for Franchisees in a Mature System
It’s not always rosy when you become a franchisee and, as I mentioned earlier, franchising is not the right choice for every person. It is essential to understand your role as a franchisee. Also, franchisors are not equal - while one franchisor can be a terrific opportunity, another could cost you your life savings. In other articles, we will discuss due diligence and understanding how to distinguish the great systems from the ones you must avoid.
Loss of Independence
Franchising requires you to give up some freedom from making some basic decisions on how you want your business to operate. For example, you can’t simply add new products and services or even eliminate those you would prefer not to sell. Your franchisor may dictate your hours of operations, and even pricing may be set or influenced by the franchise system. Don't expect to purchase your inventory from whoever you choose, even if that vendor has a special price this month; in most well-run systems, choosing the vendors is going to be done for you. For some people, this lack of independence is the most serious disadvantage of becoming a franchisee. Franchise systems are structured so that franchisors have the right to establish the brand rules, and you will be obligated to operate your business based on the franchisor’s brand standards. If this loss of freedom is something you will not be able to tolerate, don't become a franchisee - you will never be happy no matter how much money you make.
Another disadvantage is when a franchise becomes over-dependent on the franchise system. While the franchisor specifies the methods of how you need to operate to brand standards, it is your sole responsibility to manage and operate your business on a day-to-day basis. No one is going to take that burden from you.
When franchisees rely totally on the system for their success, their over-dependence causes other problems. For example, while a franchisor may have national or regional advertising, if the franchisee does not invest in local marketing they will not bring targeted customers to their location. Also, while the franchisor’s support team is available to help you make decisions, it is the franchisee’s job to run the business on a day-to-day basis, and learning to manage the business is essential to the franchisee’s success. You need to balance system restrictions with your ability to manage your own affairs.
While branding is one of the reasons for joining a franchise system because it brings to your customers who know the quality and consistency of what you have to offer, the biggest risk to your business is the performance of other franchisees. Franchisees are not only judged by their own performance, but by how well other franchisees operate. If the hotel room or bathroom is dirty in one location, the public assumes the problem exists throughout the system. Work with your fellow franchisees to ensure that everyone operates to the standards of the system.
Prospective franchisees sometimes have unrealistic expectations about the income they are going to earn from their business. Having realistic expectations is important to any investment decision. It is important in the due diligence process that you really understand how much money you will likely earn as a franchisee.
Franchise systems are governed by the contracts between the franchisor and each franchisee. Often, these agreements contain restrictions that can impact a franchisor’s ability to make changes necessary to meet a competitive threat.
Franchisors may not be able to add locations to a market or allow you to relocate your business to a market, because another franchisee may have territorial rights that cannot be encroached upon. Also, in those states that have enacted relationship laws, franchisors may be limited to what actions they can take against non-conforming franchisees, even if their bad acts are hurting your business.
The restrictions of franchising can be a double-edged sword at times — they can make franchising successful, but can also be disadvantages to some franchisees. The restrictions may be on the products and services franchisees are allowed to offer; limitations on the size and exclusivity of their territory; the possibility of termination for failure to follow the system; the added investment often required for reimaging, remodeling, or new equipment as a condition of renewal; the cost of transfer and renewal; and restrictions on independent marketing. Also, the added costs for royalties, advertising, additional training, and other services potentially reduce a franchisee’s earnings.
First, evaluate whether franchising is for you. Then understand the advantages and disadvantages and see if the disadvantages are something you can live with. Keep what is important to you in mind when evaluating any franchisor, and don't assume that every franchise opportunity is the same.