Contrary to popular belief, a franchise is not a business. It is a way of doing business. A franchise is a business relationship between the owner of the business (‘franchisor’) and the people who get the right to market and distribute the goods and services (‘franchisee’).
Some of the most famous brands are franchisors – McDonald’s, Subway, Anytime Fitness, 7-Eleven, just to name some!
What makes these businesses so successful?
Advantages of Franchising
If you are thinking of franchising your business, there are certainly positive points for you to make that decision.
- Franchising is an excellent way to tap into talent. People with strong business acumen often look to run their own business, rather than work as an employee. Getting talented individuals to manage your stores in various locations will help grow your business and build up your brand;
- As franchisees pay you to get a franchise, you receive capital for further expansion without having to take out loans, or look for investors. Nice!
- The managers of your franchises are likely going to work hard at making the store grow and succeed, considering that they put down significant amount of money to get the franchise. If you have a good business model, you can grow your business at relatively low risk, and at a rate exponentially faster than if you ran them all yourself.
If you are thinking of buying a franchise, there are certainly advantages too.
- Most franchise brands are well-established, so if you prefer not to focus on marketing or operations, buying a franchise is the way to go;
- Buying a franchise means you become a part of a franchise team that can provide you with support for similar challenges that you will face; and
- As a franchise group has large bargaining power, you will find that your stock are at relatively cheap prices.
If businesses like McDonald’s are so successful as franchises, and with all these advantages, is franchising the definite way to go?
Disadvantages of Franchising
There are two sides to a coin, and with the advantages, come the offsetting disadvantages.
As a potential franchisor, there are several factors you need to consider when franchising:
- There is potential for conflict between franchisor and franchisee, arising from different situations. As a franchisor collecting a percentage of sales as royalty, it may be of interest for you to release coupons to increase sales. That may cause a drop in profit for the franchisee, leading to a dispute;
- A non-compliant franchisee may damage your business’s brand name. In the social media age, any misstep gets amplified quickly and may cause the reputation of your whole business to drop; and
- Belonging to a franchise group means that when you come up with a new idea, you cannot just implement it. You need to negotiate and discuss with your franchisees before going ahead with it.
There are several drawbacks to buying a franchise.
- There is less autonomy in some business decisions, and you generally have to follow the rules set by the franchisor;
- There is an initial fee you need to pay to buy the franchise, which is especially high when it comes to brand name franchises;
- There will be ongoing royalty payments to the franchisor, which may be taken as a percentage of your sales or profits; and
- If you decide to sell your franchise, you have to obtain approval from your franchisor first.
You need to carefully consider the decision to franchise or buy a franchise.
If you do decide to be a franchisor/franchisee, you will be part of a sector that contributes an estimated $128billion to the Australian economy! LawPath can easily and quickly get you started with your own online Franchise Agreement form.
On 1 January 2015, the new Franchising Code of Conduct came into effect. Find out more about your rights and responsibilities.
Unsure where to start? Contact a LawPath consultant on 1800LAWPATH to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.