The pros and cons of investing in a franchise

Posted on 14th March 2016 at 4:10pm by Carl Reader in Business

There are some very clear advantages and potential disadvantages of investing in a business format franchise:

Advantages

A proven business model and brand – by joining a franchise, you are obtaining the business model that has been proven to be successful in the past. In the case of established franchise networks, you might also be purchasing a well known brand, either locally or nationally. To put this into context, a franchisee of McDonald’s could open in any town across the UK and have brand recognition locally from day one, unlike an independent fast food start up.

A knowledgable support team – the franchisor will have an obligation to support you in your business, and as a franchisor becomes more mature they tend to employ regional franchise managers to provide hands on advice and support. As the franchisor has a vested interest in your success, particularly if they receive a percentage based MSF (management service fee), they will have every motivation to help you develop your business to generate more sales and ultimately make more profit.

Reduced risk – as mentioned earlier, the business model is proven, and the main benefit of this is that in theory, the risk to you as an investor should be lower than investing in a start up business. This is simply because there is a proven blueprint (the operations manual), which will give you the benefit of the franchisors experience in business.

Control over your earning potential – unlike shareholdings in listed companies and rental properties, you will be able to have a direct input into the performance of your business, whether at an operational level (by devoting more hours to doing the work of the business), or at a managerial / strategic level.

Disadvantages

Potential reliance on the franchisee – most business format franchises require a level of input from the franchisee, and hence cannot be deemed as true ‘turn-key’ investments. There is therefore the potential risk of you being unable to work, which will affect the return that you will receive from your business – traditional investments such as shareholdings in listed companies and rental properties will continue to generate a return without your direct input.

Entry costs – a franchise has an entry cost, which is made up of both the franchise fee and the initial working capital, which might appear to be higher than the minimum required investment to start your own business, or indeed the minimum required investment for the stock market.

Restrictions on trade and territories – whilst trading as a franchise, you will be under various obligations that will be set out within the franchise agreement. They will include operational requirements (for example, you might be required to operate at certain times, or restricted to supplying certain products); and also restrictions, particularly if you are given an exclusive territory. These restrictions are generally for the good of the whole network, either from a reputation perspective or from a commercial perspective; however as an independent business owner you would be able to operate without these concerns.

The above is an extract from The Franchising Handbook, which is due for release later this year. Follow this link to pre-order and be one of the first to read it!

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