Advantages and disadvantages of franchising

Entering into small business is risky. However many would-be entrepreneurs minimize their risk by purchasing a franchise rather that starting from scratch. An entrepreneur, who has the right capital and infrastructure for manufacturing a product which is also the USP of a big enterprise, can buy a franchise from the company and his or her own outlet with the goodwill of the company.

And buying a franchise can be a quick way to set up your own business, but there are also a number of drawbacks.

Advantages

• Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
• You can use a recognized brand name and trademarks. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.
• The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
• You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same territory.
• Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
• You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
• Relationships with suppliers have already been established.

Disadvantages

• Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.
• The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market.
• The franchisor might go out of business.
• Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough
• You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
• All profits (a percentage of sales) are usually shared with the franchisor.