Disadvantages of Franchising
As with life, the advantages of franchising must be balanced against the perceived disadvantages.
Payment of an Initial Franchise Fee
All franchisors require the new franchisee to pay an initial franchise fee (IFF). This fee can range from a few thousand dollars to $100,000 or more. On average, the IFF ranges between $12,500 and $50,000 with a majority falling into the $25-35,000 range.
On-going royalty and advertising fees
Franchisors also will typically require a franchise to pay monthly royalty and advertising fees. The fees are generally a percentage of the gross income from the business. It is usual for the combined royalty and advertising fee to range between 6 and 10%. Some franchisees begin to resent these fees after several years because they have developed experience and built a strong customer base. This success often results in a feeling that the business could continue without the assistance of the franchisor. While this feeling is often misplaced -remember that the franchisor has given you the advantages that non franchised businesses lack – it still exists.
Conformity to standard operating procedures
The very nature of a franchise business is to replicate the business plan at every location so that there is a consistency of brand experience regardless of where you may find the franchise. Thus, it is important to understand that for most franchisors, there is just one way to do things – their way. Success results from proven methods of operation, so the franchisor does not want any variations. A franchisee can become frustrated when he or she believes that there is a better way to do things. Though most franchisors encourage its franchisees to innovate, the franchisee cannot implement the innovation unless and until the franchisor approves.
Inability to make changes readily
A franchisor will prohibit you from selling products or services other than those approved by it. These restrictions may be difficult to follow when you believe that there is strong customer demand for a new or different product. The larger and more established the franchise system, the more cumbersome and time-consuming change can be. The franchisee is subject to decisions made in the central office of the franchisor. As a franchisee, you must be willing to limit your independence as an entrepreneur.
Underfinanced, inexperienced, weak franchisor
It is important to realize that all franchisors are not equal. It is therefore critical that you carefully check the credentials of the franchisor’s management team and board of directors. However, do not ignore a franchisor just because the franchisor is new. Doing this may result in the loss of a great bargain or an innovative or unique concept. How many people wish they could have bought a McDonald’s franchise when Ray Kroc first began selling them?
Duration of relationship
All franchise agreements have a “term” or length of the contract relationship. This may vary between a few years to 20 years. Once the relationship has begun, there is typically no way to extricate yourself from the contract other than to sell the business. Find out what restrictions exist on selling the franchise to another person. Typically, the term may be renewed when it is up if the franchisee is in good standing. Carefully review the renewal terms.
Dependent on franchisor’s success
The success of a franchise is usually dependent on the franchisor’s success. When this occurs, the franchisee is left without brand support. Carefully examine a franchisor’s business plans and financial reports. This will help identify potential weaknesses. When this occurs, the franchisees are unable to control the situation.
But is it the right choice for you?
Find out; discuss the advantages and disadvantages of franchising with The Franchise Search Group.