Business expansion using a franchise business model is a proven way to constantly grow and generate cash in the long run. Popular brands like Domino’s, Macdonald, 7-Eleven, KFC, Zara, Jockey, and many others have expanded their business to a global level because of the franchise business. Compared to starting a business from scratch, a franchise business is a far better option because you donโt need too much expertise in a specific sector, and you can still generally get good profits in association with already well-established brands or businesses.
On the surface franchise business model may seem a win-win for the person signing up for the contract and for the franchisor as well. But thatโs not the whole picture, and if you are looking forward to signing up for a franchise from a popular brand or company, then you must know the potential pros as well as cons of this business model. Thatโs why we are here with a list of the franchise business advantages and disadvantages to help you understand it in a better way. So letโs get started.
Franchise Business Advantages
Here are some benefits of Franchise Business:
1. Incredibly Low Failure Rate
As you may already be familiar with the data of the restaurant industry, approximately 80% to 85% of businesses shut down within a few years of establishment. But on the other hand, if you purchase a franchise from a popular restaurant chain like McDonald’s, Domino’s, or Pizza Hut, the chances of failure are very slim. And the same can be applied to other sector franchise businesses as well. In short, the risk factor is pretty low with franchise businesses because a majority of the business process is readymade and proven to work.
2. Less Cash Burn
When starting a new business from scratch, you need capital investment, and without that cash flow, the chances of your business being profitable are pretty low. On the contrary, with a franchise business, all you need is the initial investment to purchase the franchise of a popular brand or company. And after that, it is pretty much a constant cash-generating machine where that brand/companyโs expertise comes into play. So when you start a franchise business, you wonโt deal with the cash flow problems, and the cash burn will automatically be on the lower side.
3. Branding And Marketing
If you were to start a business from scratch around a product, then youโd have to spend a lot of time and money on branding and advertising the product. Marketing of a brand/company also determines how well their business will perform in the long run. It is true that no matter how good your product is, if the consumers donโt know your product exists, no matter what, it wonโt be profitable for you. But because only well-established brands provide the franchise that means they already have a customer base, and you donโt need to spend anything for the marketing and branding out of your own pocket.
4. Proven Process
Franchisors usually have a proven-to-work process in place, which they pass on to the person whoโs signing up or purchasing the franchise. And to ensure that your franchise would work in the long run, many companies prefer to send a dedicated team for inspection.
5. Better Profits
In terms of the profits, of course, a franchise business is a win-win for both, the franchisor as well as the person whoโs purchasing the franchise. In rare cases, the spending of a franchise business goes higher than its income, thus the franchise usually ends up making a good profit every financial year.
Franchise Business Disadvantages
Here are some drawbacks of Franchise Business:
1. Higher Initial Investment
Higher Initial Investment in a franchise could be the only roadblock thatโs stopping you from purchasing a popular brand or companyโs franchise. In India, this amount could easily go up to a few crores. But if you can gather up the initial investment, youโre off to a good start. And the noteworthy thing is that most franchisors donโt allow you to borrow the money or take a loan to purchase the franchise. That means you must have the capital or cash on hand to purchase a franchise. On top of that, based on who the franchisor is, there may be other costs involved which you should look into before making the final decision.
2. Policies And Regulations Of Franchisor
Brands and companies that provide franchises can have a set of policies and regulations that the other party or franchisee must follow. And that way you may feel a little restricted as a franchise buyer. However, in most cases, the brand or franchisor knows that they are doing this to make the business work for both parties. Thatโs why in our opinion, it is pretty justifiable.
3. Less Individual Control
In a way, after purchasing a franchise, youโd be your own boss, but that could be just an illusion. Because in reality, you wonโt have creative control over the franchise business. For example, you canโt do the experiments with the end products, and the marketing strategy in the local area in your own way. If you still do so, then your franchise contract might get canceled. But this point is pretty obvious that everyone going down the path of purchasing a franchise would know about this fact or point.
4. Contracts
Youโve got to understand that with most franchises the contract isnโt permanent. Every franchise contract has validity, and when that validity ends, you must renew your contract. But in some cases where the franchise isnโt very sustainable in some area or city, then the franchisor may not renew the contract. In that case, youโd have to shut down your franchise. So yeah, this is one thing that people usually ignore, but in reality, it is one of the most important points to consider about the franchise business model.
Conclusion
There you have it. Now you know whether you should invest your time and money into purchasing a franchise or not. However, this thing also depends upon who the franchisor is, if itโs a well-known and popular company or brand, then there are higher chances it would be a great deal for you in the long run.