Olivia Barredo
March 27, 2023

Franchising has become increasingly popular throughout the years, and it’s no surprise why. It is a method of distributing products and services involving a franchisor, who establishes the brand’s trademark and business system in exchange for fees and royalties. Not only have many entrepreneurs successfully expanded their business, they were able to do so by also minimizing risks and maximizing profits. But how does it work, and what else can you get from franchising? Thankfully, we’ve made a little crash course on franchising a business to help you out. 

Important Things You Need to Know

The Franchise Agreement

This is nothing more than your contract. It’s a legally binding document between the franchisor and the franchisee that explains in complete detail what is expected of you in the way you operate the business in every aspect. Each franchise agreement differs from the others, as the terms, conditions, and methods of operation may vary depending on the type of business.

Types of Franchises

• Product Distribution. This type of franchising simply sells the products of the franchisor in their area of operation. The franchisor only licenses the trademark and logo, but does not provide the whole system of running the business.

• Business Format. Unlike the previous type, this type meanwhile not only provides the franchisee its trade name, and trademark, but also includes their products, services, as well as the system for operating the business.

• Management. This type of franchise meanwhile is a little different, as it simply allows the franchisee to run the business while other people carry out most, if not, all of the business activities. 

Advantages of Franchising

Brand Recognition

 One of the biggest advantages to franchising is that there’s no need for you to start your business from scratch. Franchises are well-known businesses, so the brand recognition is enough for people to know what your business is, what products and services you provide, and what they can expect. With all the advertisements being broadcasted by the brand, potential customers will be easy to find precisely because of brand recognition, ultimately leading to having a built-in customer base. 

 Training and Support

 Another one of the benefits to franchising a business is that the franchisee will receive business assistance in the form of training and support from the franchisor. The franchisor then will provide guidance that will duly help the franchisee operate and own the business. 

Lower Failure rate

 Because of the amount of support being given by the franchisor combined with the brand recognition, franchises are known to have a lower failure rate than independently owned businesses. This is because franchisees not only join a successful brand, but are also now connected to a network that offers support, advice, and all the knowledge they need to properly run a business and remain successful.

 Moreover, there won't be a need to test and prove your business concept. When franchising a business, there is reassurance that the products or services being offered are surely in demand. 

Disadvantages of Franchising

Costs

 While high costs usually translates to gaining higher profits, dishing out the required amount of money to franchise in the first place might be straining to a small business owner. Even if the plan is to get a low-cost or cheap franchise, initial costs are most likely going to be really expensive especially if you’re planning on franchising a popular brand.

 Other than initial costs, the franchisor will also require ongoing investments even after you start the franchise. Royalty fees, advertising costs, and training services are just some of the ongoing investments that might be stipulated in the franchise agreement, so it is important to go through them thoroughly to be fully aware of the amount of fees the franchisee will have to take into consideration when franchising. 

Restrictive regulations

 Despite the franchisee having a number of liberties when operating the business, they are still unfortunately not completely in control. Not only that, but the franchisee is unable to make any decisions without taking into consideration the franchisor’s thoughts and opinions.  These restrictions are made to maintain uniformity throughout all the different franchises and the overall brand, which may feel limiting to the franchisee. 

Potential for Conflict

 Whether it be a lack of support, or personalities and ideas clashing, there is a possibility that the relationship between a franchisor and the franchisee will face conflicts. To avoid this, franchisors must screen all potential franchisees before entering into business with them, while franchisees must also take the opportunity to assess the franchisor’s management style and personality.

 Franchising can be an effective strategy for entrepreneurs looking to expand their business. While it does offer many benefits such as seeing high costs and having low risks of failure, this doesn’t mean that franchising doesn’t come with its own set of risks and other challenges like the exorbitant costs and potential conflicts with the franchisor. It is important to weigh the pros and cons and spend ample time in thought as well as do proper research before making important decisions like these! However, with the right approach and preparation, franchising can be a successful and profitable way to grow a business.