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Pros and Cons of Franchise Businesses
For the individual owner, there are definite advantages to franchising, some of which are outlined in the list below.
Pros of Franchise Businesses
- Well-known trademark, either regionally or nationally, and its cumulative goodwill - saving the business owner the cost of creating and advertising a name that customers already recognize.
- Established business framework - minimizing the startup problems and guesswork involved in starting a new business.
- Well-tested sources of supply and service - saving time and trouble in finding suppliers of needed products and equipment.
- Ongoing sales and marketing assistance - franchisors have proven, existing, and successful systems of advertising and marketing.
- Financial assistance - banks and similar lending institutions are willing to lend money to a business that has the backing of a successful franchisor. Most franchisors have direct financial assistance or help in finding adequate sources of financing.
- Reduction of risk - you are buying into an established concept so the risk of failure is lower.
- Ongoing research and development - most franchisors constantly research and look into vital information such as competition, product demand, seasonal variations, and community attitudes.
- Site selection and business support - the franchisor helps with selecting a suitable site location, building construction design and supervision, employee training, and operational support.
- Proven operating methods and procedures for creating and selling the product.
- Standard quality, uniformity, and desirability of the franchisor's product or service.
- Collective buying power and centralized purchasing system - franchises may be able to purchase supplies at a reduced cost since the franchisor can purchase in bulk and pass the savings to the franchisees.
Furthermore, with franchising expansion seems to come more naturally. Operating a successful franchise may quickly lead to building a second and then a third business, and so on. In fact, some franchisees own all businesses of a particular franchise in an entire geographical area. Fortunes have been built this way.
However, despite the advantages to franchising, buying or starting a franchise business is not for everyone. Some of the disadvantages to franchising are discussed in the list below.
Cons of Franchise Businesses
- Loss of control and freedom - since the franchisor's standards have to be adhered to, a franchisee may have limited scope for individual personal initiative.
- Ongoing royalties could be as high as 10% (or more) of revenues - this amount could determine whether you business is profitable or not.
- The initial franchise fee can be quite substantial. It can range anywhere from $4,000 to $20,000 and, in some cases, up to $50,000!
- Advertising fees - there is usually a fee for advertising on a regional or national basis. If the franchisor does not make the best use of your advertising dollars, this could be a waste of money.
- Required Signage - most franchisors have a developed sign package that the franchisee is required to purchase. This can be very expensive for the small business owner.
- The franchisor's problems are also your problems - for example, you could have a serious issue if there was a conflict between the franchisor and a major supplier.
In summary, despite the disadvantages of owning a franchise business, it generally offers real advantages with considerably reduced risks over going it on your own. All franchises are not created equal and research and due diligence should be done before starting or buying any franchise business. Franchising cannot guarantee a profit. You, as the business owner, are ultimately responsible for the success or failure of the venture.
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