Instead of executing the formalities to create an unincorporated business, entrepreneurs often invest into a franchise that is already established to start their own business. But what are the benefits and disadvantages of franchises?
In terms of a business structure it is possible for a franchise to be a desirable alternative. With many advantages, it’s usually the preferred choice for those who want to establish a business without the risk of starting a business by themselves.
An Established Business
Franchises offer the advantages that it operates under the umbrella of a well-established business. The concepts, the name operations, the methods of operation and more are test-driven and set to be used over and over again in a new location, every franchisee is able to take on the responsibilities.
A well-known brand
The operation under the banner of a franchise enables a franchisee to benefit from the already established brand of the company. This means that there is likely to (in the theory) be less effort (and expense) needed to establish and expand the brand name of the business. The brand will already be recognized and respected by the marketplace and consequently should generate an ongoing stream of brand loyal customers. A franchise agreement is an advantages of the franchise’s trademark and the advantages of a trademark that is registered.
Simpler Business Financing
Another advantage of franchises is that getting business financing is usually simpler. Investors are much more inclined to invest in a company that has a solid network, a secure brand and an effective support structure. In certain instances, financing can be obtained from the franchisor making it easier for the business that is just starting out.
Business Relations
Franchisees also have the opportunity to profit from the many business relations already created through the franchisee’s franchisor. It is likely that connections with the suppliers (and maybe distributors) are already established and simple to manage. The benefits of having established relationships with marketers and advertisers teams can be beneficial for new businesses starting up.
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and Security.
Franchises have the benefit of security and support. The majority of franchisors provide courses of instruction and help in areas like the administration of sales, accounts advertising, and so on. These kinds of services could include in the cost of the franchise cost.
Most likely to fail
The old adage says that 95% all businesses are unsuccessful within five years. This (false) notion is often promoted by franchisors who are trying to attract new customers to join their ranks. The assurances offered by a franchise could make it appear that the company is less likely to fail.
How Much Money You’ll Earn?
Some people think that a further benefit of starting an enterprise is that you can earn more. Because of the support from a well-known name and a large brand, they believe they’ll attract more customers , and therefore greater profit. But, that’s not always the situation. The franchisee’s fees has to pay the franchisor typically results in a significant reduction in profits and due to the limitations imposed by the rules of the franchise , it is usually difficult to invest the money in a tax efficient manner such as create a limited business. A franchisee may reap more profits initially but, in the end they’ll often discover that their own company could have yielded more profit.
The disadvantages of a Franchise
Like any other business plan there are drawbacks to the establishment of the franchise. A lot of people are under misconception that the benefits are greater than the disadvantages. However, this is due to the fact that they are in awe of the risk of starting a business completely from beginning from scratch. The requirements for setting up an LLC that operates under the franchise are the same as setting up your own business.
No Control
The most important disadvantage of a franchise its lack of control. The franchisee is not in control over the business or the way it’s managed (or only a limited amount of control). The business rules are already in place and are included in the agreement for franchise. The way the company operates is defined by the name of the franchise, and it is rare for the new franchisee will be capable of operating outside the boundaries.
Tied To Suppliers
If you own as a company, you’d prefer to reduce costs. Locating the lowest-cost suppliers will help reduce your costs and increase your profit. Being within a franchising system you’ll need to use the supply network of franchisees. You’ll be bound by the supply chain that is dictated to by your franchise contract. The obvious disadvantage for the franchisee isn’t just that you are not in control but the loss of potential profit.
Risques from Other People
A major disadvantage of an franchise is the possibility that other franchisees could damage your company’s reputation. As a franchisee, you depend on the name of your business to attract your customers. If other franchisees do something to harm the reputation for the company, it could have a negative impact on your business. It could affect your profits and sales.
Franchise Costs
This is a major drawback for many franchises: the cost. The franchisee is usually expected to pay a initial fee to sign an agreement with the franchisor. As part of the continual franchise agreement, they’ll continue to pay for support and training offered through the franchisor. In the long run this means that there is a limit to the amount of revenue (and money in your pockets) that you could earn as an franchisee. Forming a company to establish the company of your own may be the best choice since there are fewer restrictions on how you run your business, and there are more opportunities for profit, with none of the cost of overheads.
A Cut of Your Profit
The franchisor is expected to take an amount of the profit. They are typically paid in the form of “franchise charges”.
It is crucial to comprehend how franchise fees work. Most often, they will be fixed , periodic fees (often each year) and a portion of the profits the franchise company makes.
You put in all the work, but you yet you have to pay in exchange for their name (and help). When the times are difficult it could mean an additional decrease in profits already at a low and an uphill battle to grow your business.
It is difficult to leave a business
Selling a company can be difficult. Selling a franchise company could be more risky because any purchaser is bound by the terms which were negotiated with the franchisor prior to when the franchise was granted. The original franchise agreement likely have been negotiated to cover an unspecified time period, therefore even if the company is profitable and has been profitable, the conditions of the franchise need to be revised upon renewal. Any prospective buyer might be put off by the uncertain conditions the franchisor might want to include upon renewal.
Conclusion
Like other types of legal business the benefits and drawbacks of franchises must be evaluated and balanced before beginning your business. The primary benefit is the security aspect, however the cost and the lower control and profit could put some people off. Most definitely, people would rather start an own business instead of be bound by an agreement for franchise. This isn’t to say that establishing the franchise model isn’t worth considering.