Many franchise models have the potential for decent returns but there’s a lot of hard work involved. Like all business ideas, there are pros and cons – deciding whether a franchise will work for you is essential as the start-up costs can be considerable.
A recognisable and trusted brand is a key element to business success – just look how at how much profit the world’s most recognisable brands - such as McDonalds and Nike – make. Building a reputable brand takes a lot of money and years of hard work; partnering with a well-known franchisor can do some of this hard work for you. People instantly recognise the quality of your brand and you do not need to establish so much goodwill for them to buy your products or services.
Many first time entrepreneurs choose franchising because of the ongoing support and guidance available. There are no doubt advantages in having regular advice to keep you going in the right direction. The level of support will vary but many franchisors will not only provide on-the-job training but also assist in lead generation, accounting and start-up costs. They may also provide assistant or support with marketing campaigns.
Because franchisors have access to more cash than first time business owners, they can afford to buy property in the best locations and give your franchise the best chance of success. Even franchisors that don’t buy the property may be able to assist you in purchasing in a better location, for example by negotiating with commercial lettings managers.
Entrepreneurs that choose to go it alone must spent significant amounts of time defining their market, demographic and target customer. Not only does this cost money, particularly performing primary qualitative and quantitative research, but it does not guarantee sales or even interest. Franchises work with established markets where the research has already been proven effective – you go into the business knowing who you’ll be selling to and where you’ll be doing.
Easier access to finance
Bank managers assess loan applications on the basis of risk – the riskier the operation the less chance the bank will see a return. Since franchises work with proven business models and often have the backing of a large parent company, banks are more likely to lend to franchises than independent businesses.
Franchises can be very expensive. Franchisors typically charge an initial lump sum ‘joining fee,’ which can range from under a thousand pounds to several tens of thousands depending on what is included. If equipment and materials are not included, you may have to purchase these separately. You’ll also have to pay royalties to the franchisor, typically a percentage based on your turnover, as well as standard business overheads which can really stretch your budget. Once your franchise agreement comes up for renewal, you may need to pay a one-off cost to extend it; this will depend on the franchisor.
Lack of control
Franchise agreements will make it very clear what you can and can’t do – contract breaches can result in termination of the franchise without repayment of funds invested. Franchisors generally do not like divergence from the brand so you’ll likely be told precisely how to set up your premises and will have little say in how things are structured. The way you generate leads may also be subject to scrutiny.
External factors can influence success
Many things can affect the success of your business, even those that are outside of your control. With franchises not limited geographically, another franchisee may start operating in your area and push you out due to increased cash flow or shrewder practices. If this is legit under the terms of your franchise agreement, there’s nothing you can do about it. Likewise, poor decisions by the franchisor may seriously affect business – if their brand suffers then you may start losing customers.
Franchises take enormous amounts of effort to get off the ground. Although the franchisor does not provide initial support, this is merely a helping hand – it’s down to you to get the business running profitably. You’ll need to implement the chosen business model and then hone it to work effectively within the context of your working environment, staff members and experience.