Franchise Business: Important Advantages and Disadvantages to Know

Franchise Business
Franchise Business
Written by Jonathan Veers

A franchise is a form of agreement between a person or a group of people (franchisee) and a certain trade group (franchisor) for the right to use their trademark, brand, for their own commercial purposes. Simply put, a franchise is the use of a trademark to sell your own goods on a lease basis, writes Success Constructor.

Franchising as a system has been proven as a great way to quickly grow and advertise your business. As impartial statistics show, the use of such a system allows 80% to overcome the five-year milestone in the development of the company and continue to work with high profits. For comparison: the majority of self-promoted firms barely even reach two years.

When purchasing a franchise, you, first of all, buy a knowingly winning and profitable business, and you will work in tandem with an experienced and reliable franchisor who not only has an idea of ​​how to develop a successful business but is also ready to provide comprehensive assistance to his ward, as he is interested in the profitability of the latter’s business financially.

How much does a franchise cost?

Typically, you will have to pay a lump-sum fee when renting a trademark. This is a non-refundable one-time fee that serves to validate your eligibility to use the franchise. Every month you will pay exactly 8% of the turnover to the trademark owner itself. This payment is called royalties. In principle, this payment is equivalent to the rent.

When starting a business, an important component of success will be to obtain information from the franchisor about the approximate amount to be invested in the business. This could be a great advantage of using a franchise over your own business. Indeed, when starting a business, virtually no novice businessman will be able to adequately assess the number of upcoming costs. And whoever provides you with a franchise often already has hundreds of branches throughout the country, and can give you the exact amount of costs that you need to start a business.

However, in addition to the initial payment and royalties, you, and as an ordinary entrepreneur, will have to bear the costs of purchasing equipment, renting, advertising costs, and salaries for your employees.

What are the advantages of a franchise?

Any businessman or company who decided to start their business under the auspices of a franchise has many advantages:

Brand awareness they lease. This rule does not always work. There are many franchisors present, a trade brand that is dignified only at the regional level. However, most of the companies that offer a franchise are distinguished and enjoy great success in our country as well abroad.

High speed of promotion of your business. You can imagine the length of time it can take to develop a business independently, as well as to gain consumer confidence. But if you have obtained a ready-made business, you will very easily be able to receive such profits that you could only have been able to achieve after a few years(provided that your company would have stayed sustained at all). McDonald’s franchise could be the canonical instance for the above case. On the first day of the opening of these restaurants in the capital, experts estimated that more than three thousand people were standing in line!

Education. Once you’ve acquired a franchise, you won’t need to spend years learning how to run a business, or just getting into a rut. You would not be able to get all the knowledge because of your own bitter experience, but from several special training courses that the franchisor issues to all of his franchisees who have built an agreement with him.

It is worth making a reservation here that in order to be successful in business, you will need to work on accomplishing certain skills and abilities even before you are going to open your own company.

Support and advice. A normal franchisor always provides full support to his wards. They have every chance to avoid those mistakes that are simply inevitable in the independent development of their business.

If you use a franchise, you will also spend an order of magnitude less on an advertising campaign and paraphernalia. You will also receive all advice and recommendations on advertising slogans, colors, and types of company attribute from your franchisor. Some companies with which a franchise agreement is established may even provide the tools necessary for the operation. The cost will be added to the lump-sum payment.

Advertising support. Many trademark owners who have an interest in developing their franchisee’s franchise business can even advertise on various sources like newspapers or TV channels.

Your business will immediately receive a clear territorial demarcation, which will also be discussed in the franchise agreement. The limit for doing business will immediately be set down in the contract. Once you have acquired a license, you can conduct and develop your business in the decided territory. And after that, the threat of competitors who own the same franchise as your franchise is automatically removed. An entrepreneur who establishes and runs a business on his own can never assume for sure where his competitors might hit.

What are the disadvantages of a franchise?

The very obvious disadvantage is the cost of the franchise, and the amount is quite big.. If you decide to buy a ready-made business, then be ready to fork out. This is true when you acquire exclusive rights to a brand within a state/region or even a city. The lump-sum payment, in this case, can be especially large. However, you will be the only businessman who can use this trademark in the region.

Another unpleasant characteristic of a franchise is that it has very strict requirements. Oftentimes, it happens that the activities of those who have acquired a brand are placed in a very limited perspective. In the main, the owner of the brand can be understood, since he just wants his business to develop. After all, there are some rules, violations of which can make an individual easily go bankrupt.

However, in some cases, such requirements may not serve well. For example, in the case of McDonald’s. The fact is that in order to buy a franchise, you will have to buy a premise because if you rent a premise for your business, you will not be allowed to buy a franchise.

There are also certain necessities related to the size of the premises where your production will be established. It is not easy to predict how much the franchise costs in this case, because it totally depends on the franchisor. Most often, the “gold standard” is a space of at least 100 squares, which you can think about buying. hire a trusted mortgage broker limited company who can help you find property for your business.

In addition, the terms of the contract may not be very favorable. All experienced franchisors have a whole staff of lawyers who draw up such complex contracts in which the interests of the franchise owner are utmost respected.

In this regard, if you plan to purchase a franchise, be sure to take advice from experienced lawyers who will thoroughly analyze the contract.

Moreover, franchised businesses often face serious development restraints. Imagine you have an interesting idea to grow your business. For example, you have come up with some other service you can offer to your customers. If you could introduce it into the business, then your profits could increase significantly. But it often happens that under the terms and conditions of the contract you are not allowed to do this.

Clearly, due to the same occurrences, you are not able to advance your business creatively. Overall, the franchise is based on the fact that you get a ready-made plan. Everything has already been thought out in it long before you. By the way, the founding fathers of the very idea of ​​modern entrepreneurship talk a lot about this, warning that with such an approach, one can generally forget how to think independently.

And do not think that you can calmly disregard the terms of the contract. If you do this, then the franchisor can easily deprive you of the right to the franchise, not to mention a whole bunch of fines. As a rule, all this is spelled out in the contract.

And if your employer goes bankrupt, another organization will buy his business … After all, the rights to the business (including yours) are transferred to completely different people who can put forward completely different conditions for cooperation. Your business may turn out to be unprofitable at the moment. That is why, when buying a franchise, pay attention to its term. Some companies grant ownership of their trademark for twenty years, and some for only five.

And one more significant drawback. The fact is that many franchisors require you to buy the necessary consumables either from them or from their partners. In this case, the feasibility of the franchise is generally questioned, since you find yourself in a very disadvantageous position: you have no right to either buy consumables from competitors or otherwise reduce your own costs.

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                                                            Author Bio

Jonathan is the founder of SPV Mortgages. He can help you find and secure the best-limited company mortgage options to push your property investment dreams forward. As a specialist mortgage broker with over 10 years of industry knowledge, he has helped experienced landlords and first-time investors across the country; saving you time and money in tracking down the best rates.

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About the author

Jonathan Veers