Here are some of the key things to consider before entering into a franchise agreement.
Because the franchise’s business formula has been proven to be effective, often in different locations and markets, entering into a franchise agreement is less of a risk than starting a new independent business.
According to industry research conducted by the British Franchise Association (BFA), less than 1% of franchised businesses close every year due to commercial failure and 93% report profitability. Compare this to the fact that fewer than 50% of UK start-ups do not make it beyond five years (GOV.UK, 2019) and one in five start-ups fail to make it past their first year (Telegraph, 2019).
Attracting customers and employees can be hard for a new business. However, by buying into an existing franchise, you get access to a loyal base of customers and a potential pool of keen employees from day one.
A franchisee will benefit from any national or local marketing undertaken by the franchisor. This will often include channels that a new business owner would not normally have access to, such as national press, trade publications and TV.
Although highly advantageous, this coverage will usually incur additional marketing fees levied on the franchisee. In which case such costs will always be laid out in the franchise agreement.
Because franchises have a proven track record of success, banks are more likely to lend money because your projections will be based on experience and reality. In addition, you are more likely to receive favourable terms, especially if you are entering into an agreement with a well-established franchisor who may have already negotiated terms with lending institutions.
Other advantages may include:
- Support and training
- Supplier relationships
- Research and development
Lack of control
When you enter into a franchise agreement, you surrender a great degree of day-to-day control and decision-making to the franchisor as well as a percentage of your revenue. Restrictions on what you can and cannot do may mean that you cannot pursue potentially lucrative business opportunities that fall outside of your franchise agreement.
Devaluation of brand
No matter how well you run your own business, there is always the risk that another franchisee may damage the reputation of the franchise brand. For example, if there is an outbreak of food poisoning at another restaurant owned by a franchisee in your network, the resulting news headlines and social media outcry may harm your reputation, even if your hygiene standards are exemplary.
Other disadvantages may include:
- Failure of the franchise
- Restrictions on selling the business
There is a lot for you, as a budding franchise business owner, to consider, and it’s vitally important that you weigh up these pros and cons before you make your decision to move forward. Best of luck!
For more details on the advantages and disadvantages of buying a franchise, download our free franchising guide (part 1) here