There’s no way to know for sure whether franchising is right for your company until you evaluate its pros and cons in the context of your operations. That usually requires the help of a franchise attorney or consultant, but before you start talking to the experts, you should get a sense of the key advantages and disadvantages.
Franchising offers three major benefits to business owners seeking to expand operations:

1. Access to better talent.

Franchising is a great way to find talented people to manage your locations and give them an incentive to work hard. The most qualified and hardest working people generally prefer to invest in running a business in return for profits rather than taking a salary as an employee. So by franchising, you are going to get better talent that will work harder to build the business than you would by hiring someone to work for you.

2. Easy expansion capital.

Franchising is a good way to obtain expansion capital. Because your franchisees pay to buy outlets in your chain, you can grow the number of locations without tapping much of your own capital or needing to request financing from banks or investors.

3. Minimised growth risk.

Franchising can generate high financial returns for relatively little risk. Unlike adding company-owned outlets, when you franchise, you put relatively little money into adding each location. If you have a good business model, you can earn high royalties from sales at those outlets. The percentage returns you earn can be many times what you would have earned if you opened and ran the outlets yourself.

Offsetting these positives are three major disadvantages of the franchising business model:

1. Less control over managers.

You can’t tell franchisees what to do the way you can with employees. Franchisees are independent businesses. Moreover, they have different goals from yours, which can easily conflict and even lead to legal trouble. Consider the classic example: Franchisors make money by collecting a percentage of sales as a royalty for letting the franchisee use their brand name and operating system. Franchisees make money from the outlet’s profits. Anything that boosts sales, but not profits will create conflict between you and the franchisee. If you want to offer customers promotional coupons, franchisees may likely object. Coupons boost sales, but not always profits, benefitting the franchisor, but not necessarily the franchisee.

2. A weaker core community.

It’s more difficult to get franchisees as opposed to hired store managers to work together. Franchisees have an incentive to profit from each other’s efforts to generate business. For instance, your franchisees might try to get out of paying for the advertising needed to attract customers, figuring they will get the customers anyway if other franchisees buy the advertising. Of course, if all of them do the same thing, you end up with no customers because you’ve got no advertising. There are ways of minimizing franchisee free riding, of course, but those cost money and require enforcing your franchisee contracts in court

3. Innovation challenges.

It’s a lot harder to innovate with franchising than if you own your own outlets. With franchising, if you come up with a new idea, you have to negotiate with your franchisees to get them to accept the new product or whatever innovation you want to introduce, instead of just putting the new idea in place on your own.

Before you talk to the experts about franchising your business, consider these pros and cons. Franchising isn’t a silver bullet for business expansion. But when the advantages outweigh the disadvantages, it can be a great way to grow your business.

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The term franchise is generally taken to mean the legal arrangement, whereby one party grants a license to another for the purpose of retailing its goods and services, often in a specified territory or area. This type of franchise is usually called a ‘business’ format because the franchisor presents the franchisee with of a model with how the business will operate, and imposes stringent controls on the franchisee in respect of how the business will be run. This is the most common type of franchise.

2. Why take out a Franchise?

From the franchisor’s point of view franchising offers an opportunity to expand quickly and at a reduced cost. The greater the number of franchises there are the more purchasing power the franchisor will have. This will benefit both the franchise holders and the franchisor. From the point of view of the franchise holder this gives them an opportunity of becoming self employed. It also offers them to get straight into running the business as the franchisor will usually have extensive training programes and will pass on the know how of getting started up cost effectively. The franchisor will also have the benefit of the ongoing advice and support that is associated with a franchise. Also it is said that it is often easier to raise finance to buy a franchise than it is to raise finance to set up business on your own. This is particularly true when the brand is a well known one and is a well run franchise

3. Disadvantages of owning a Franchise.

As with most commercial arrangements there may be pitfalls with franchising and it is important to be aware of these. The principle disadvantage from the point of view of the franchisor is the loss of control suffered. They do not have direct control over the production and this may be frustrating if thy have always had this. He will of course seek to put restrictions on the franchisees in regards many issues. Yet from the franchisee’s point of view this can be very restricting and they may resent this level of control. From the franchisee’s point of vie the principal disadvantage is of course that they must pay a percentage of their profits to the franchisor.

4. Preconditions to setting up a franchise.

Both the British Franchise Association and the Irish Franchise Association Codes of Ethics for Franchisors require that a franchisor has at least one years experience itself in running a business before considering franchising. From the point of view of the franchisee it is preferable to look at a pilot operation which has produced an audited set of accounts and where it will be possible for the franchisee to evaluate the profitability of business.

5. Intellectual property considerations.

It is important to remember that at early stage that the franchise agreement itself will confer on the franchisee a package of intellectual property rights. If the franchisor’s intellectual property rights have not been protected then they should be considered immediately. The intellectual property will usually be either a trademark of some kind, a patent over a process that the company has developed, a copyright or a registered design. The franchisor will arrange for all licenses to be given to the franchisee under the agreement and can only be used under the terms of the agreement.

6. The operating manual.

This contains all the know-how which the franchisor has accumulated in the operation of the pilot scheme and all the necessary information in relation to successful running of the franchise. It is effectively the blueprint for the operation of the franchise business. It will cover all the practical information required by the franchisee and will include matters such as accounting systems, sales and service reporting requirements, equipment requirements etc. As it contains the business secrets it will not be given up until a binding agreement is in place. The agreement will usually provide that that the content of the manual will be kept confidential and will not be copied or disclosed to third parties.

7. The Franchise Premises.

Not all franchises are property-based. Many operate as mobile franchises, for instance through the use of customised vans, and others may be operated from the franchisee’s own home. In many cases, however, a premises will be required. If this is the case then the franchisor will need to consider how important the location of the business is for the development of the franchise network. If it is of major importance then he may wish to retain control of the premises in some way, so that if the relationship breaks down he can continue to run it himself or get a new franchisee.

8. Drawing up a franchise agreement.

Once the franchisor is in a position to offer franchises, he needs to consider the preparation of the franchise agreement. This document will license the franchisee to carry on the business, using the know-how, the trade name and the trade mark, in accordance with the manual. It is important to adopt a reasonable approach when drafting the franchise agreement. It is necessary to strike a balance between protecting the franchisor and giving a workable document to the franchisee. A standard franchise agreement should be used with all franchisees which imposes the same controls on all of them. The agreement will also need to comply with competition law requirements.

9. Franchise fees.

One usually finds that the money given by the franchisee for the grant of a franchise is threefold. Firstly there is the initial fee. This is generally a substantial cash sum paid by the franchisee to the franchisor for the privilege of becoming part of the franchise network. It generally includes a fee for the entitlement to use the trademark, the franchisor’s costs of approving the franchise, approving the premises etc. Secondly there are the management fees. These are generally calculated as a percentage of the turnover, although I some product based franchises the fee is included in the wholesale price of the product and no separate fee is levied. Thirdly it is usual for the franchise agreement to provide that the franchisee will make a contribution towards the cost of having the brand advertised. This is usually calculated as a percentage of turnover.

10. Obligations of both parties.

A franchisor’s obligations are likely to relate to such matters as the fit-out of the premises, the provision of training and the provision of the manual. Their continuing obligations include promoting the brand during advertising, not to compete with the franchisee by granting other franchises in the area and the obligation to provide ongoing advice and assistance to the franchisee during the term. The franchisee’s obligations are more widespread. They include the control of the franchise premises, the franchise business, the products, the trade mark, the payment of fees, record keeping, confidentiality provisions, non compete obligations and insurance and indemnities.

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Franchisees whose skills are a good match for the business tend to do better than those who are not in their element—but how do you know if the concept you’re buying is right for you? It’s really quite simple: ask yourself what you like to do. For example, if you love kids, find a franchise that allows you to work with them. If you have a passion for technology, seek out a computer-related franchise concept. However, don’t just think about the product or service, but what your actual daily tasks will be. You may love to cook, but owning a restaurant will be about more than just food. In fact, your primary tasks will involve managing, hiring, training and firing staff.

In addition, make sure your skill set matches what the franchise will require of you. Do you like building long-term relationships with customers? If so, a postal franchise might be right for you because customers come back regularly. However, if too much routine bores you silly, a postal unit would be your worst nightmare.

2. Improve your business skills.

While franchisors will teach you their system to help you build a successful outlet, most also expect you to bring some basic business skills to the table. If you don’t know accounting basics, how to read and work with financial documents or how to hire and fire employees, you’re going to encounter trouble.

If your sales skills are rusty, your knowledge of business taxation is a bit shaky or you’re not up to date on Internet marketing, consider taking a class to improve your skills. Continue to upgrade your knowledge annually. These classes are often available at a local school; there are even one-day seminars and webinars (Internet-based seminars) that take less time and monetary investment.

3. Follow the system.

Part of the reason you choose a particular franchise is because it has a successful system. In order to be successful, you have to learn that system. Don’t just ‘get by’ during your initial training; absorb everything they can teach you. Continue to read the manuals and work with other franchisees up to and after your opening day. Don’t listen when franchisees try to tell you they have a better way than the franchisor’s—you are purchasing a tried-and-true system, and you owe it to yourself to follow every element of that system until you understand it completely.

If you implement changes on your own, particularly in the early days, you could put your franchise at risk or run into unforeseen consequences that the franchisor already has anticipated. Don’t try to be a rebel – only make changes after speaking about your concerns at length with your field representative. By taking this approach, you can avoid making a rash error (and possibly save your franchise).

4. Have a business plan.

While the thought of putting together a business plan might be intimidating to a franchising novice, it doesn’t have to be. It can be as simple as setting some goals and doing a financial projection for the next year or detailed enough to take to the bank for cash. When in doubt, ask you franchisor or fellow franchisees for advice on how to proceed.

5. Play well with others.

A friend of mine named John opened a quick-service restaurant (QSR) franchise when the company was relatively new to franchising (it was a recognized brand, but had previously relied on corporate-store expansion). As such, there were some glitches in the franchisor’s dealing with new franchisees versus corporate unit managers. Some franchisees started playing political games—they formed groups, talked incessantly, complained about the marketing, objected to the rules and generally whined—but John kept out of it.

When the company’s field rep walked in, John treated him with respect. He listened carefully, asked questions and maintained a positive attitude. When a new policy came out from corporate, he implemented it without complaint. He refrained from gossip and spent time with like-minded franchisees, discussing what a great opportunity they had in this business. In return, the franchisor treated him with respect. Guess who got first choice when a unit became available?

Corporate employees are dedicated people who are doing everything they can to make franchisees successful, but first and foremost, they are people. Your efforts to respect and listen to them will pay dividends for you. (The end of the story: When John sold his multiple units, he banked a huge profit!)

6. Take control.

Part of the appeal of a franchise system is the support a franchisor can provide. However, the ultimate success or failure of your franchise is largely your responsibility. Yes, your franchisor is going to train you on its system and give you the tools to build a business—but you will be on your own to run the day-to-day operations of your outlet. You can call the franchisor with questions, but the decisions will ultimately be yours. Embrace and enjoy this freedom—it’s part of the appeal of entrepreneurship.

7. The Franchise Premises.

Not all franchises are property-based. Many operate as mobile franchises, for instance through the use of customised vans, and others may be operated from the franchisee’s own home. In many cases, however, a premises will be required. If this is the case then the franchisor will need to consider how important the location of the business is for the development of the franchise network. If it is of major importance then he may wish to retain control of the premises in some way, so that if the relationship breaks down he can continue to run it himself or get a new franchisee.

8. Never stop marketing.

As a franchisee, your job, first and foremost, is the sales and marketing of your product or service. Don’t wait for your franchisor to remind you—get your marketing out there all the time, analyze the effectiveness of each method and share effective techniques with your fellow franchisees. If you’re busy working on your computer or handling other administrative tasks over marketing initiatives, you are limiting your success.

9. If you can’t sell, hire someone who can.

Simply put, some people just hate to sell. They just aren’t comfortable picking up the phone or working a room. However, sales are an inevitable part of almost any franchised business. If you don’t feel comfortable handling this task, you need to find someone who will.

Ask for help from your franchisor and fellow franchisees who have effective salespeople on staff. Instead of hiring someone just like yourself because you like them so much, recognize that as a business owner, you’re going to need to leave your comfort zone and hire someone with a different personality and skill set. A highly successful friend of mine puts it this way: “Hire people smarter than you—that’s the key to forming a great team.”

10. Learn your industry.

Once your franchise is up and running, learn as much you can about your new industry (in addition to what you learned during your franchise research). Almost every sector has associations and meetings where business owners gather and share ideas. Trade associations and local boards of trade bring together new and established businesspeople, providing a great forum for learning and networking. Your fellow franchisees can also offer great insight into your industry; don’t ignore this valuable network.

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