Major Advantage of a Franchise: Everything You Need to Know
One major advantage of a franchise when starting a business, is that it allows expansion without worrying about the risk of debt or the cost of an entity.3 min read
Having the major advantage of a franchise that allows expansion without worrying about the risk of debt or the cost of an entity is a primary reason why many entrepreneurs look to a franchise when starting a business.
Advantages of a Franchise
Consider these advantages if you would like to purchase a franchise.
Lower Failure Rate
When a franchise is purchased, the buyer is tapping into the success of an already established business concept. According to statistics, franchises have a higher percentage of success than those starting an independent business. The percentage is high for independent businesses not surviving with a failure rate of 70 to 80 percent, while it is just the opposite for franchises that have an 80 percent survival rate.
Help With Start-Up and Beyond
Many franchises are turnkey operations, which means lots of help is available from the get-go as well as continued help once the business is up and running. Franchises buyers receive:
- Initial training instruction
- Ongoing management training
Being part of a franchise operation means you'll benefit from the collective buying power of the parent company. When the franchisor buys in bulk, the savings are passed to the franchisees. This results in savings to your business. This would not be the case with an independent business.
When buying an established franchise with a well-known national brand name, you are essentially starting out with a customer base already familiar with the product or service.
A franchise can be very profitable, especially when choosing a popular and known business. While the costs may be more expensive for a franchise like McDonald's, the business is more likely to generate high returns in the long run.
Franchise owners can take advantage of the fact that they will be responsible for many of the responsibilities a corporate office handles with an independent business. This means the franchise can afford to operate with a much leaner organization with less staff.
Ease of Supervision
As a franchisor, managing individual franchises is not their responsibility. Those decisions fall to the management crew of the franchise, not the franchisor.
Franchises are generally valued higher due to several factors, which include:
- Increased profitability.
- Increased organizational leverage.
- Faster growth.
Disadvantages of Buying a Franchise
Rules and Guidelines
As a franchise owner, many times the franchisor will retain control over several areas of the business regardless of whether you are an independent business owner. Disadvantages may include:
- Business location.
- Hours of operation.
- Signage layout.
- Furniture theme.
- Uniform resale terms.
- Use of franchisor-supplied products only.
This control over a franchise is to ensure the uniformity of the product, location, product availability, and pricing that customers expect.
On top of the original franchise fee, a franchise owner is responsible for paying the franchisor royalties and a percentage of the revenue generated by your business on a monthly basis. There may be other charges/fees to pay, such as advertising costs.
Continued support once the franchise is up and running may or may not be an option. Some franchises are start-ups only, meaning you take on all the responsibility of setting it up on your own. Other situations may occur where support is promised but is not forthcoming.
For a well-known franchise, this can require deep pockets since it will most likely be very expensive. If cash is limited, you'll need to have the credit standing to arrange the necessary financing.
While little-known and inexpensive franchises may be available, they are also a gamble. Keep in mind that just because franchises are being offered for sale, there is no guarantee that they will be successful and turn a profit. Also, while success is subjective in terms of the franchise performing well, the business will probably never reach the level or successful and profitability an owner envisions.
It is recommended that before investing in a franchise that you do a thorough investigation of both the franchisor and the product or service the franchise offers. For some franchisors, selling franchises on an ongoing basis is a business unto itself. This is where the franchisor makes their money.
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