Instead of carrying out the formalities to create an unincorporated business, entrepreneurs often invest into a franchise that is already established to begin their business. But what are the benefits and disadvantages of franchises?
In terms of a business structure it is possible for a franchise to be a desirable alternative. With numerous advantages, it’s usually the preferred choice for those who want to establish a business without the risk of setting up a new business for themselves.
An Established Business
A franchise gives you the benefit being able to operate under the umbrella of a business that is already established. The concepts, the brand as well as the operational methods and more are tested and proven and are is ready to be used repeatedly at new locations every franchisee is able to take on the responsibilities.
A well-known brand
Working under the umbrella of a franchise allows the franchisee to profit from the brand name that was previously established for the company. This means that there is likely to (in the theory) be less work (and expense) required to establish and expand the image of the company. The brand will already be recognized and respected by the marketplace and, consequently, should result in an ongoing stream of brand loyal customers. The franchise is the advantages of the franchise’s trademark as well as the advantages of having a trademark registered.
Simpler Business Financing
Another benefit of franchises is that getting business financing is typically simpler. Investors are much more inclined to invest in a company with a well-established network, solid brand, and a solid support system. In certain instances, financing could be obtained by the franchisor, which makes things easier for the business that is just starting out.
Business Relations
Franchisees also have the opportunity to profit from the many business relations already developed with the franchisor. It is likely that relations with supplier (and maybe distributors) are already established and simple to manage. The benefits of having established connections with marketing and advertising teams could be beneficial for new businesses starting up.
Security
Franchises have the benefit of security and support. Most franchisors offer programs for training and assistance in areas like the administration of sales, accounts advertising, etc. These kinds of services could become part of the cost of the franchise cost.
Most likely to fail
The conventional wisdom says that 95% companies go under within five years. This (false) fact is frequently advocated by franchisors trying to draw new members to join their ranks. The protection offered by the franchise could make it appear that the business is less likely to fail.
Are You More Profitable?
Some people think that a further reason to start an organization is that it will earn more. When backed by a large name and a large brand, they believe they’ll have many more customers, which means higher profit. But, that’s not always the situation. The franchisee’s fees pay to the franchisor usually result in a substantial reduction in earnings and because of the limitations imposed by the rules of the franchise , it is usually difficult to invest profits in a tax efficient manner such as create a limited business. Franchisees may benefit from more profits initially however, in the end it is likely that owning their own business could have yielded more profit. Read more here.
The disadvantages of a Franchise
Like any other business plan there are drawbacks to the establishment of franchises. A lot of people are under misconception that the benefits outweigh the drawbacks. This is due to the fact that they are in awe of the risk of starting a business by starting from the ground up. The requirements for setting up an LLC that operates under the franchise are the same as setting up your own business.
No Control
The most important disadvantage of a franchise it is that the person who franchises is not in control over the operation or the way it is operated (or extremely limited control). The business rules are already in place and are as part of an agreement with the franchisor. The way the company operates is defined by the name of the franchise. It is rare for an aspiring franchisee is allowed to operate outside of the borders.
Tied To Suppliers
If you own as a company, you’d want to cut costs. Find the most affordable suppliers will help reduce your costs and maximize your profits. However, being an affiliate implies that you’ll need to use the supply network of franchisees. You’ll be bound by the supply chain that is dictated to you in your franchise contract. The main disadvantage of being the franchisee isn’t only that you are not in control but the loss of potential profit.
Risques from Other People
Another major drawback of an franchise is the possibility that other franchisees could damage the image of your business. As a franchisee, you depend on the name of your business to attract your customers. If other franchisees committed a crime to harm the reputation that the business has, it could have a negative impact on your business. This could negatively impact your profits and sales.
Franchise Costs
This is one of the major disadvantages in the majority of franchises – the expenses. The franchisee is usually required to pay an initial cost to purchase the agreement for franchise. In the course of the ongoing franchise agreement, they’ll have to pay on-going charges to support and education offered from the franchisee. In the long run this means that there is a limit on the amount of profits (and cash in your pocket) you are able to earn as an franchisee. The process of forming a company to establish the company of your own may be the best choice since there are fewer limitations on the way you run your business and you will have more ways to earn money, without the cost of overheads.
Take a Cut of Your Profit
The franchisor is expected to take an amount of the profit. They are typically paid as “franchise costs”.
It is essential to know how franchise fees are calculated. They are usually fixed-priced periodic fees (often each year) as well as a portion of the profits the franchise business generates.
You’ve put in the work but yet you have to pay to allow their name (and assistance). If times are tough it could mean an additional decrease in profits already at a low and an uphill battle for your company.
The process of exiting a business is challenging.
Selling a company can be difficult. Selling a franchised business could pose more risks because any purchaser is subject to the terms that were agreed upon with the franchisor before the franchise was granted. The initial agreement for franchises will likely have been negotiated to cover an agreed-upon time frame, which means that even if the venture is prosperous and has been profitable, the conditions of the franchise require re-negotiating upon renewal. Any prospective buyer could be discouraged due to the uncertainty surrounding the conditions the franchisor might want to establish upon renewal.
Conclusion
Similar to other forms of business legal The advantages and disadvantages of franchises must be considered and balanced prior to setting up your new venture. The major benefit is the security, however, the expense as well as the lack of control over profits may put people off. Most definitely, people would rather start an own business instead of being bound by the franchise agreement. This isn’t to say that establishing the franchise model isn’t worth considering.
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