Franchising is widely seen as a less risky route to business ownership than independent businesses – but you must be willing to sacrifice full creative control over your business.
We examine the pros and cons of franchising – encompassing the business model, the benefits, costs and constraints – and the kind of entrepreneurs it suits and doesn’t suit.
Want to be your own boss but feel anxious about going it alone? Well, franchising offers an alternative path to business ownership.
But buying into a
So how exactly does franchising, which generates $177 billion for the Australian economy annually, differ from starting your own business or buying an independent going concern?
What is a franchise?
A franchise is a business model– famous examples including McDonald’s, Boost Juice or Gloria Jean’s – with locations across the city, state, country or international.
Every successful franchise started with a single independent business.
Having fine-tuned their business model to build a thriving operation, the owners expanded the business not by investing in additional premises and staff, but by selling to other aspiring entrepreneurs the right to do so instead i.e. to franchisees.
Franchisees own the business and the profits generated – minus certain fees paid to the franchisor.
Building a business from scratch, buying an independent business and buying a franchise each
If you’re curious about buying a franchise, you should familiarise yourself with the benefits and drawbacks first.
Successful franchises are widely seen as less risky ventures than start-ups - 60% of which reportedly fail within their first three years.
However, the risk isn’t zero and a newish franchise with a handful of outlets is a somewhat riskier venture than joining the thousands of thriving McDonald’s
But do your due diligence on your preferred franchise – just as the franchisor will do on you as a potential representative of the brand – and you can be confident you’re buying into a formula road-tested by the company founder and other franchisees.
Compare this to a start-up, whose business model is being exposed to the real world for the very first time.
With dozens or even hundreds of outlets around the country, franchises are generally well known to the public. Customers will be familiar with your products/services and they will trust you to deliver.
And if franchising is lower risk for you it is also lower risk for the consumer – they know what to expect when they walk into a Subway, for instance.
Training and support
A good franchisor provides training at the outset and support in all areas of the business thereafter – from HR and accounting to marketing and customer service.
So, in a
A franchisor can also help you secure prime trading locations. You may have noticed that major brands, not independents, tend to dominate high-footfall areas on the high street or in shopping malls.
Willing to work hard
Just because you get training, support
Fortunately, if you lack the right attitude or attributes then franchisors, who will closely
Franchisees generally involve a smaller upfront investment compared to like-for-like independent businesses. However, there are additional, ongoing financial commitments to the franchisor.
As well as an upfront franchise fee, franchisees must usually pay royalty fees as a percentage of revenues. Depending on the franchise, there could be other fees involved too.
But in return you benefit from marketing campaigns with a reach you couldn’t possibly afford as a start-up (barring a long-odds major investment or viral success).
And the franchisor’s bulk-buying power may well give you access to lower wholesale prices.
Willing to surrender creative control?
The most obvious drawback is the limit to your entrepreneurial freedom: you must adhere stringently to the business model and you have little influence in how it evolves.
The franchise agreement that you and the franchisor sign sets out the terms of the franchisee-franchisor relationship and imposes constraints on what you can and cannot do with your business.
Only the franchisor can choose product lines, set prices, revamp branding and devise marketing campaigns.
Such constraints would become unbearable if, for instance, the franchisor failed to revamp a tired brand, set prices too high or you suffered the consequences of an ill-advised marketing campaign.
If you crave creative control, then franchising is certainly not for you.
Never owned a business?
Franchisors rarely stipulate that candidates must have prior experience of running a business. By giving you the backing of a major brand, a franchise could be a great first foray into business ownership.
If you’ve run independent businesses before then you may find the constraints stifling – unless of course you found building a start-up a lonely, stressful experience despite relishing being your own boss.
Franchising offers a generally safer, often cheaper route into business ownership, but should be avoided if you want control over every element of the business.
If you think franchising suits you, read our next guide to choosing the right franchise.