Before you invest in starting a franchise business, you need to look at the pros and cons of the scheme.
Pros:
The simplicity of the system. A ready-made franchise business is optimal for those who have no experience of entrepreneurship. All schemes have been developed by professionals and have been tried and tested many times. Therefore, franchisees do not have to learn from their own mistakes.
A well-known brand. Huge investments are made to develop a brand: it can take years before consumers start to recognise and trust the brand. But the franchise business involves using a well-known name that has already gained the trust of customers.
Business support. The franchisee can count on the help of the franchisor, who usually provides complete information on the business, the organization of supplies, service, promotion, sales and many other important issues for the success of the business.
Advantages in lending. It is much easier to get a loan from an established brand than from an individual entrepreneur “off the street”. The franchise owner can also act as a guarantor when taking out a loan.
Cons:
Dependence on the franchisor. Franchisees have less freedom of choice than independent entrepreneurs, as the course of development is determined by the brand owner. If the franchisor does not do well, it will inevitably affect all franchisees. On the other hand, in good times, they share with him the financial boost.
Payouts. There are two types of payments to be made to the buyer of the business model. First of all, when signing the franchise agreement, he or she pays an introductory lumpsum payment. This is a one-time fee for the right to intellectual property of the selling company. The amount of the lumpsum depends on the brand recognition and the amount of information to be transferred. It averages around 10% of the total investment.
After signing the agreement, the franchisee pays a monthly royalty. This may be a percentage of revenue or a fixed amount. As a rule, regular payments amount to about 6-7% of the franchisee’s turnover. Some franchisors make discounts for new partners in the first months of work. The regular payments may also include a marketing fee for the advertising campaign.
Obligations. The new partner has obligations to the franchisor – it must clearly comply with the terms and conditions of the brand provision. There have been repeated cases of franchisees closing a franchise business because the franchisee failed to provide the required level of service.
Statistics
According to the International Franchise Association, there are currently 16,500 franchisors and more than 1.2 million franchisees worldwide. Some large companies have 1,000 or more franchisee partners.