Having an in-depth knowledge of advantages and disadvantages of buying a franchise is very important before you make your choice for this type of business ownership and that’s why we have brought 18 pros and cons for you today. Apparently, there are countless advantages of a franchise and a common person has a mindset that if I had enough money to buy a franchise, I will do it blindly.
No doubt that there are many benefits that can definitely convince you to buy one. But we all know that where there is good, there is darker side as well. We hope that you have read our article on types of business ownerships, if not we suggest you to quickly skim it for better understanding.
Franchise form of business
If you have already read our article about types of business or know basic concept of franchise form of business. You are good to skip this section and jump on to the merits and demerits section directly. If not, we suggest you to give two-three minutes so that you can have a basic idea about what is franchise form of business.
Franchise is not a stand-alone form of business but it’s kind of hybrid of 2 or more types of businesses we have discussed.
Understanding franchise business type is quite simple if you know about two parties that are involved. The franchisor and the franchisee. The franchise is owned by the franchisor and franchisor do agreements with the franchisee allowing them (franchisee) to run business under the name of their (franchisor) brand name.
Some franchisors restrict their franchisee to follow the business model and strategies of the company. However, some left it as an open choice for franchisee whether they want to opt their own business plans and strategies. Just like business plan, model and strategies, profit share vary from franchise to franchise.
We have many franchise examples of food, clothing and shoe brands like McDonald, Outfitters and Nike etc. Bigger brands like these three don’t really focus on only one business type i.e. Franchise. They follow hybrid of 2 or 3 business types and sometimes more.
Advantages and Disadvantages of buying a franchise
Before we start pros and cons, make sure you know that there are two different terms when it comes to franchise. Franchisee who buy a franchise and franchisor who owns the brand and sell its franchise. We have already explained the advantages and disadvantages of franchising your business (franchisor’s perspective). Following are the pros and cons of buying a franchise (franchisee perspective).
- Buying a franchise of a successful brand clearly describes that its business model and plan is well proven and you don’t have to worry about them at all
- You buy the franchise of someone else business but still you are considered as the boss and not the employee of that franchisor.
- Quality product and services is the main thing a consumer wants and a franchise follows the rules and agreements and are bound to maintain the quality of the brand
- Buying a franchise as business is less risky as compared to starting a new business and setting up everything from the start. Franchise business is already well established and maintained and customers are already familiar with it so the trust factor is all good as well.
- Many franchisors help you so much that even an inexperience person can run franchise easily. You get the training, supplies, strategies, marketing tips, promotion’s plans and all other management tricks.
- You can get higher profit percentage because of the higher buying power of your franchisors as they will buy products in bulk and pass these products to the franchisees as well. Hence, you will get higher savings because of low cost of inventory
- No need to worry about attracting the customers as many brands are well known by the people and once you buy a franchise in their region, you will have trust within them already.
- Franchise business allows you to start generating revenue right from the first day as people are familiar and they have trust in the brand.
- Business relationship plays an important role in growth of your business like relationship with advertisers, suppliers and marketing team etc. You buy a franchise, you get these relationship good to go as they are already in contact with other franchises around you.
- Higher success rate of franchise as compared to a new business start-up.
- Banks can offer good amount for lending to franchises.
- Franchises are not just an agreement. You have to pay the cost. It depends on franchisors whether they take monthly rent or monthly profit share. Some franchisors sell their franchise for a one-time payment but its way too high.
- Monthly rent or profit share doesn’t mean that you don’t have to pay the initial amount. Even in this case the price is still too high that it may take 2-3 years until you equals the amount you paid initially and start generating profit.
- Some franchisor put so much restrictions in the agreement that you start feeling may be its not even your business and you are an employee. For e.g. Location of franchise, opening and closing time, pricing, products, promotions, resale terms and even furniture and layout of the franchise.
- The cost is too high that an ordinary rich person can’t afford to buy a franchise. Let us give you an example of McDonald’s franchise which costs $1.3-2.5 Million dollars initially and after that you have to pay $40000-50000 monthly.
- There are franchises that are not much successful or famous and apparently you might think that this is a perfect opportunity as their cost is low. Keep in mind that franchisors don’t really care about the revenue generated by the franchises. They just want to sell as much franchises as they can. So, little-known franchises are like a gamble. They can either double your bank balance or ruin your wealth in worse scenario. Therefore, read the agreement and contract terms carefully.
- The biggest disadvantage is that if the business or franchisor crumbles, all franchises have to face it and you have to close as well no matter how much you have invested or generating revenue.
- Franchisors have the authority to end the contract and not renew it. No doubt that franchisee have also the choice of not renewing the contract but franchisor can do it as well no matter you are successfully running it or not.
Buying a franchise like all other business forms have advantages as well as disadvantages. What we conclude is that its good to start a franchise business rather than starting a new one as the customer trust and familiarity is already built. Just keep in mind that franchisors don’t often care about the success of franchises. They are only concerned with their overall profit. Also, it is recommended t read the agreement and contract very carefully as things can get ugly afterwards.
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