What is franchising? The pros and cons

franchise small business

Franchising is when the owner of a product or service (the franchisor) grants a licence to an individual (franchisee) to sell, distribute or market their goods. McDonald’s, Pizza Hut and Europcar are all well-known franchises that enjoy global recognition.

If you don’t have the means to buy an existing business and starting an enterprise from scratch sounds too daunting, owning a franchise could be the answer. The question is, how do you choose a franchise and what are the pros and cons of becoming a franchisee?

How to choose a franchise

Leaving aside the pros and cons of running a franchise for the moment, how do you decide what kind of franchise is right for you? First, decide what kind of business you’d like to get into and what you’re good at doing. If you enjoy interacting with the public and delivering a great service, then operating a restaurant franchise may be ideal. On the other hand, if the heat of the kitchen doesn’t appeal, a car-rental franchise may be more suitable. The point is to choose a franchise that you believe you’re suited to and are willing to commit to wholeheartedly!

Your finances

The level of investment you’ll be expected to make to take on a franchise can vary, from a relatively small amount that you may be able to fund from your own resources to the kind of sum you’ll need to secure through a loan. Ask yourself how much you’re willing to invest and/or are prepared to borrow. Does the franchisor help with funding? How much working capital will you need and what kind of returns can you expect? What ongoing costs are there in running the franchise?

Do your homework

When you approach a franchisor, you are likely to be presented with loads of information but make sure you prepare your own questions as well. How has their business grown and what makes them successful? Have they had any franchisees fail – if so, why? What type of support do they offer in terms of training and marketing?

Don’t simply accept everything the franchisor tells you about the business or the support you can expect. Try and speak to other franchisees to get their side of the story.

Seek advice

Consult family and friends for their input and get professional advice from your accountant and bank manager. It’s also worth contacting a professional body such as the British Franchise Association for tips, advice, and franchise opportunities. Remember, taking on a franchise doesn’t guarantee you’ll be successful so make sure you’re aware of both the risks and the rewards!

The pros of franchising

  1. Recognised brand: Operating a well-known franchise such as Subway or Pizza Hut has clear advantages for franchisees. From the get-go, your customers will recognise the brand and will know what to expect when you open for business. This means you won’t have to blow a chunk of your budget on marketing your products or publicising your outlet.
  2. A proven system already in place: Buying a franchise means there is already a tried and tested system in place. This includes everything from stock control, distribution, accounting, property management to finding contractors. The franchisor will also supply a range of marketing materials, graphics and software you’ll be able to use.
  3. Ongoing support: The level of support you can expect will vary, but many franchisors provide training programmes for you and your staff. You’ll be part of a bigger family who you can call on for advice and gain from their expertise and experience.
  4. Your own patch: One clear benefit of the franchise system is that you’ll have your own, clearly defined area to operate in. The location will have been chosen to optimise the opportunity by attracting the largest number of customers. Buying a franchise allows you to run a business in a prime site, something you may not be able to afford as an independent trader.

Some cons of franchising

  1. Funds, fees, and royalties: You will have to pay a lump sum to operate a franchise and have a minimum amount of working capital before a franchisor will consider your application. Franchisors make their money by collecting royalty fees from your business. Typically, this comes off at source from your takings and not from any surplus you make. When your fixed–term contract is up, you’ll need to pay a fee for extending the franchise. In the meantime, you’ll still have pay for the everyday running of the business.
  2. Franchise rules: You may be your own boss but you still have to do things the way the franchisor wants. This means you can’t make alterations to your premises or introduce a new product or service as the franchisor retains control at all times. If you value your independence, this arrangement could start to feel stifling after a while.
  3. Limited control: If a franchisor makes a bad decision or attracts negative publicity this could impact on your business. This means that while your own operation can be successful, you’ll have to trust others, who you have no control over, for the ongoing success of the brand.