In the wake of the Great Recession and staggering job losses, many employees have been confronted by the reality that traditional corporate employment can no longer be considered a relatively low risk and stable avenue to financial security. As a result, many people are considering a dream that they have had at one time or another – starting their own business.
There are two basic types of business ownership for most new business owners: Establishing your own independent business, or becoming a franchisee/licensee of an established business. In either case (whether franchise or non-franchise), the new business owner can also either start a new business or buy an existing business (which normally costs more). In the next installment of this series, we will discuss the pros and cons of buying an existing business versus going the start-up route. For now our focus is on some pros and cons of franchised businesses for those starting up a new business.
Benefits of Franchised Businesses
- Established Business Model and Brand. The biggest advantage of buying a franchised business is that the business model has already been established. This often means the franchisee gets the benefit of established intellectual property like trademarks, brand identity and customer loyalty. Perhaps even more important, franchisees have access to proprietary information about the best way to succeed in the business without having to reinvent the wheel themselves. You can (and should) talk to current franchisees before committing to a franchised business.
- Training. Virtually all franchisors offer (and require) fairly extensive up-front training, and most offer ongoing training, refresher training and periodic meetings at which best practices are discussed.
- Business Support. With a franchise, it is sometimes said that “You’re in business for yourself, but not by yourself” because you have some degree of support in your effort to succeed. That support network includes not only the franchisor, but frequently also other more experienced franchisees in the system.
- Marketing Support. Franchisees may have the support of national or regional advertising and marketing, as well as already prepared marketing materials for local advertising and marketing efforts.
- Supplier Networks. Franchisors often have established relationships with suppliers for the equipment, materials and supplies needed in the business.
- Reduced Risk. For these reasons, carefully selecting and starting a new franchise of an franchised business brand is often less risky than starting an independent business from scratch. However, it is still important to recognize that you will still be the owner of your new business, and the ultimate success of failure of that business will likely be due primarily to your own personal efforts.
Disadvantages of Franchised Businesses
Most of the disadvantages of franchised businesses are the flip-side or otherwise flow from the advantages set forth above. These include:
- Limited Flexibility to “Do It Your Way.” As a consequence of the benefits of buying into an established business model, franchisees must adhere to sometimes detailed operating standards and follow the rules and procedures established by the franchisor. As an example, a franchisee will normally have to have its advertising approved by the franchisor, and it may have to buy its supplies and materials from a prescribed source. A franchised business may not be the right model for the inveterate “rule breaker” or “free spirit.”
- Upfront Fees and Costs. Because of the initial training provided and the other costs incident to bringing on a new franchisee, franchised business operations usually involve the payment of significant upfront fees. Some franchisors may have financing options, and other third parties may have financing options that would-be franchisees can explore.
- Royalty Payments. During the term of your franchise, you will typically have to pay some set amount or percentage of your monthly gross revenues back to the franchisor.
- Marketing/Advertising Fees. In return for national or regional advertising, franchisees may have to pay into a marketing fund or be required to expend a certain amount each month or quarter on their own advertising.
- Long-Term Agreement. It is important to select a franchised business that is right for you because most franchise contracts are for ten year initial terms (although many franchisors will assist you in selling or transferring your business to someone else if you need or want to). In addition, you will likely be limited for two years or so in your ability to operate a competing independent business in your same area after your franchise agreement ends.
Because franchise contracts include significant obligations on the part of all parties, it is imperative that you consult an experienced franchise attorney to assist you with understanding all the ins and outs of the franchise agreement. For more information on franchising, please contact Scott Simmons at MG Law, (804) 622-1262.
The materials on this website are meant for informational purposes only and nothing contained in this site is to be construed as legal advice. If you need legal advice, you should contact an attorney directly. Do not act upon the information on this site without seeking professional guidance. Information on this website about specific matters or success in previous cases is not meant to be a prediction or guarantee of similar results in any other case. Each case consists of factors and applicable law unique to that case and you should consult an attorney.
