The Advantages and Disadvantages of Franchising

Launching a new business can take a tremendous amount of time and investment, requiring market research, a business plan, licenses and permits, brand logos, and more. Franchising an existing business can be a quicker, less risky option: the franchise owner signs an agreement with an established brand and works with an experienced team that can provide the necessary resources. 

What Is Franchising?

Franchising is a strategic alliance between two parties – a franchisor, who is the owner of a business, and the franchisee, who has bought the rights to sell the franchisor’s products and services.

The franchisee typically pays the franchisor an initial startup fee, annual licensing fees, and an ongoing percentage of gross revenues for the use of the franchisor’s name and business model. In return, the franchisee receives access to the franchisor's proprietary business plan and can sell its goods or services for a specified period in a particular geographical area.

Food Fuels the Franchise Market

Franchising is a popular way to do business. FRANdata, the market research arm of the International Franchise Association, estimated there were slightly more than 790,000 franchises in the U.S. in 2022, which employed more than 8.4 million people. 

Food and beverage franchises are by far the most popular type of franchise and have historically dominated the top 10 list of U.S. franchise operations. For 2023, however, Franchise Direct, a franchise industry knowledge center and marketplace to help franchisees find franchisers, changed its ranking methodology to emphasize the level of investment required to get started. Consequently, many fast food franchisers fell lower in the rankings. Franchise Direct's 2023 list of top 10 U.S. franchisers were Chick-fil-A, The UPS Store, Ace Hardware, McDonald’s, Wendy’s, Snap-on Tools, Matco Tools, RE/MAX, Express Employment Professionals, and Wild Birds Unlimited.

What Are the Advantages of Franchising?

Beyond offering an easy entry point into business ownership, there are several advantages of owning a franchise, particularly if you select a franchisor that is in good financial shape, is growing, and is managed well.

Launch a business quickly.

Franchisors often help franchisees find the right location and assist with setting up the business, providing tried-and-true guidance on everything the franchisee needs to know to efficiently get the franchise business started, from purchasing equipment and supplies to marketing products and services. 

Increase the odds of success. 

According to the U.S. Bureau of Labor Statistics, slightly more than one in five U.S. businesses failed in their first year for the year ending March 2022 – a ratio that has remained roughly consistent for decades. Because franchising allows an owner to use an existing, established business name and proven business model, franchised businesses have a higher success rate.

Establishing a reputation for a business can take years. Rather than starting from scratch, a franchise often comes with brand recognition and an existing customer base.

Tap into an established customer base. 

Establishing a reputation for a business can take years. Rather than starting from scratch, a franchise often comes with brand recognition and an existing customer base. That means customers who are already familiar with a well-established brand may be waiting outside the door the moment a new franchise opens. 

Keep costs stable.

When starting a franchise, owners likely won’t get hit with as many unexpected costs as they would if they were starting an independent business. That’s because many of the operating processes have already been thoroughly thought out, priced, and tested, so a franchise owner can accurately estimate the fees owed to the franchisor and other costs.

Gain the support of a larger group.

The owner can become part of a larger existing network, allowing the franchise to access successful marketing and operating strategies and work with other franchisees to promote the brand. In addition, the parent company can often negotiate deals to purchase products in bulk at a discount, which can result in lower costs for all franchises. In many cases, franchises also benefit from the company’s regional or national advertising campaigns.

Pique the interest of investors and lenders.

Because a franchise comes with a successful business plan, investors are often more likely to fund one than an unproven brand and business model. The lower risk involved with a franchise may also make it easier to access loans to help launch the franchised business. 

Evolve with ongoing training.

In many cases, the franchisor has established a training system that helps prepare franchises to launch their businesses and handle a variety of potential issues. Training typically continues once the business is established, so owners are continually introduced to new or refined processes. 

What Are the Disadvantages of Franchising?

Prior to entering into a franchising agreement, potential owners should fully understand the potential drawbacks and legal implications involved in their relationship with franchisors. 

Lack of independence.

Starting a business is often appealing for owners who get to call the shots and make the business their own. When franchising an existing business, owners have less control and are limited in the products they sell, the décor they use in their stores, the methods for marketing the business, and more. As a franchisee, business owners can’t make as many independent decisions. This can be especially challenging if decisions made at the corporate level affect a franchise’s bottom line. For example, the company may decide to offer new products and discontinue others that may not benefit a franchise in a specific area. 

High costs.

The initial investment for a franchise can be high. The more well-known and successful the business is, the higher the price often runs. It’s important to consider ongoing costs, including royalty fees, training fees, and advertising costs. To avoid getting hit with surprises, franchisees will want to carefully review the franchise contract and weigh what they’ll get for what they’ll pay. 

What Makes a Franchise Successful?

Though many factors can determine whether a franchise thrives, these best practices can help increase the odds of success.

Find a suitable match.

Find a franchisor committed to building the brand, growing at a reasonable pace, and helping franchises succeed. Franchisees can evaluate a potential franchisor’s past financial performance and contact other franchisees to make sure the business has a strong track record of success.

Connect with other franchisees.

Sharing advice and support with peers can go a long way toward helping an owner solve common problems that may arise. 

Go by the book.

Franchise owners receive a playbook for success based on the company’s previous experience and proven methodologies. Following the strategies that have worked for the company helps maintain the brand’s integrity and ensures the franchise can build on the business’ success. 

Be open to help.

Franchisors typically provide franchises with ongoing product development, highly visible marketing, and a network of other franchise owners to collaborate with. Be open to this support as the franchisor often has years of experience and knows what works and what doesn’t.

Get involved in the community.

A franchise agreement often requires the business to conduct local marketing to ensure it maintains high visibility in its community. Getting involved in local events or activities – such as sponsoring a local sports team, festival, or marathon – can help potential customers consider the franchise a trusted and valued member of the community – one worthy of their business.

The Takeaway

Franchising can be a good option for someone who wants to go into business using a proven business model and an established company name. A solid franchising agreement can help the business owner capture market share more quickly and with greater odds of success than a solo venture. Franchises typically offer advantages such as cost stability, training, and the support of a larger network. However, franchising also has some potential downsides, including less control over decision making. Understanding the pros and cons of franchising can help people determine if franchising is the right choice for an entrepreneurial venture.

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