The Pros and Cons of Franchising
If you’re feeling overwhelmed by the idea to start your own business from scratch, you should consider franchising. Franchising is a business model in which a person or company (franchisee) purchases the right to use another person’s or company’s (franchisor) trade name and business system. Basically, a franchisee gets an easily recognizable brand and ready-made business model which has already proven its effectiveness. Sounds good, right? However, like any business model, franchising has its strengths and weaknesses. In this article, we’re going to scrutinize both sides of the franchising coin. Let’s get started!
- What is franchising?
- Types of franchises
- How franchisors control their franchisees
- Is franchising right for me?
- Top 3 franchises
What is franchising?
Successful examples of franchise businesses are plenty. These are popular fast food chains (Domino’s, Dunkin’ Donuts, Baskin-Robbins), clothing stores (Zara, 7-Eleven), and hotels (Marriott, Hilton, InterContinental), to name a few. As we’ve already outlined in the introduction above, franchising refers to an arrangement where the franchisor licenses the franchisee the license to use their business model in return for a royalty fee.
The franchise business model has a proven record of success across multiple sectors, including retail outlets, travel agencies, gyms, car repair shops, beauty parlors, etc.
Since the franchisor is the one who owns an already successful business, they consult the franchisee and provide them with unique and valuable information on how to manage their business. The franchisee learns how to hire and train new staff, develop a smart promotion campaign, find reliable suppliers, build relationships with customers and business partners, and more. Be prepared that every aspect of your business will be regulated by the franchisor. As a reward, the franchisor gets a percentage of the franchisee’s monthly income (royalty payment).
Types of franchises
Franchises come in all shapes and sizes. The franchising model you choose depends on your industry, marketing strategy, budget, and other factors. Let’s see the four major types of franchises.
- Job franchise. Opt for this model if you want to start a laundry, travel agency, repairs shop, domestic cleaning business, etc. This is the cheapest type of franchise because it requires minimal startup investments. Most of the time, you only need to purchase some basic equipment to get your business up and running. Plus, this type of business can be easily managed by one person.
- Product franchise. When using this model, the franchisee distributes a product under the franchisor’s brand. Product-driven franchises are common among large enterprises that deal with cars, machinery, equipment, spare parts, appliances, computers etc.
- Business format franchise. This type of franchise is the top choice among restaurant chains, gyms, and clothing retailers. In this case, the franchisee gets the entire ready-made system to run the business and promote the product or service.
- Investment franchise. In this case, the franchisee invests money into the franchisor’s business, expecting to get a return on their investment. This type of franchise is characteristic for hotel and restaurant chains.
How franchisors control their franchisees
Quality control is one of the crucial characteristics of franchising. You must have noticed how McDonald’s restaurants all over the globe have identical (or almost identical) menus, employee uniforms, and interior designs. Indeed, the fast food giant makes sure that all its franchisees comply with its quality standards. This requirement is true not only for McDonald’s but for any franchisor.
All franchisees have to take special courses where they learn how to manage the franchise business. In case with McDonald’s, their training course covers a wide spectrum of business aspects, from food storage, to customer communication, to the size of hamburgers.
All brand identity guidelines (color palettes, patterns, logos, etc.) are outlined in a special booklet which is called “brandbook”. If franchising is something you’re willing to explore, you can’t possibly do without a brandbook! With Logaster, creating a professional and good-looking brandbook is a walk in the park. Save both time and money by benefiting from Logaster’s expertise!
Create a smart brandbook in a couple of clicks!
The online brand identity maker will create a logo, color palettes, and fonts for your business, and put them all together in a neat brandbook. Download your brandbook in PDF and distribute it among your franchisees!
Is franchising right for me?
Franchising has both benefits and risks. If you’re a novice entrepreneur whose business experience is limited, be sure to carefully weigh all pros and cons before purchasing a franchise.
- Buying a franchise is less costly than starting your own business.
- You get a ready-made business with its product lines, financial model, marketing strategy, etc.
- You get a recognizable brand with a loyal customer base.
- You can benefit from the expertise of a seasoned company.
- You get a solid base of customers and suppliers.
- You get professional consultations on marketing and sales.
- Franchising comes with limited business freedom and flexibility.
- Franchisor’s problems automatically become your problems.
- Choosing a weak or unreliable franchisor may ruin your efforts.
Before franchising your business, ask yourself these questions:
- Do I have enough experience and skills to start my own business? Or do I feel more comfortable borrowing someone else’s business ideas and practices?
- Do I have enough startup capital? How much money can I afford to spend?
- What amount of business freedom and creativity do I want for myself? Do I prefer to make my own decisions or do I need constant guidance?
- What do I want to achieve? Will I be content with having a small steady income or do I aim for global recognition?
Top 3 franchises
Choosing a good, reliable franchisor is a tough task. Before making such a crucial decision, be sure to collect as much information on your potential franchisor as possible. Both official and unofficial sources will do. Visiting the franchisor’s sales outlets, consulting franchising brokers, and reading customer testimonials on the Internet is just a small part of what you can do. Make sure your research gives you answers to the following questions:
- How much does it cost to buy a franchise (one-time franchise fee)?
- What other costs are associated with buying a franchise (equipment, payroll, rent, etc.)?
- How much is the monthly royalty fee?
- What support and assistance will be provided by the franchisor?
- What standards and guidelines will I be contracted to follow?
- How popular are the franchisor’s products or services?
- Who are my competitors?
- What can I learn from other franchisees within my niche?.
Feeling lost? No worries! Franchise Direct has come up with a list of the best global franchises in 2021. Let’s see the top 3 franchises from this ranking. (Spoiler: All of them are fast food businesses!)
The world’s biggest fast food franchisor is dead serious when it comes to living up to the highest quality standards. Its future managers get special training at the so-called Hamburger Universities. Currently, there are 8 campuses worldwide, including those in Moscow, Sydney, and Tokyo. And here is one more thing: it turns out that getting into Harvard is easier than enrolling into the program at the Hamburger University. Isn’t that crazy?
McDonald’s representatives provide each franchisee with detailed consultations and comprehensive support. On their part, franchisees are contracted to comply with the company’s standards that regard food preparation, packaging, customer service, and other aspects.
Initial investments: $464,500 to $2.3 mln
The KFC franchise agreement allows franchisees to use the company’s trademarks, commercial practices, business formats, and other intellectual assets. Each franchisee must take a training program to learn more about the KFC brand and boost their skills. Also, KFC provides business loans to those of its franchisees who can’t afford the startup costs.
Initial investments: $1.4 to 2.8 mln
The Burger King franchise agreement entitles the franchisee to produce and sell the iconic burgers using the company’s trademarks, brand names, design, equipment, color palettes, and other unique assets. To get the green light to open a Burger King restaurant, you first need to sign up for BK’s franchise training program.
Initial investments: $333,100 to 3.4 mln
The decision to purchase a franchise business is not to be taken lightly. The franchise model comes with both benefits and limitations. On one side, you get an established brand with a recognizable image and finely tuned business processes. On the other side, you have to compromise your entrepreneurial freedom by having to follow the rigorous standards imposed by the franchisor. Before taking a leap into franchising, it makes sense to do some research and identify the franchising opportunities you can afford. Also, be sure to scrutinize each of your potential franchisors. Remember that choosing an integral and trustworthy franchisor is half of success!