Buying a Franchise – Pros and Cons

by | Franchises

Thinking about buying a franchise? There are several factors that need to be considered. What’s good and what’s bad about a franchise?

Franchises – The Good

1. The business is already up and running

There will be an initial outlay of money for the franchise but the purchaser/s should hit the ground running. There shouldn’t be any uncertainty as to whether or not the business will be successful if the right franchise has been purchased.

2. Success (almost) guaranteed

If the prospective franchisee has carried out his/her due diligence including speaking to existing franchisees, carrying out some online research, and talking to customers he/she should be satisfied that the right franchise business is being purchased. The business is not an unknown quantity. The risks associated with start up businesses should be significantly reduced with established franchise businesses.

3. Practices and procedures are all in place

Everything associated with providing the service or making the product should be standardised. A new business will, inevitably, have to deal with glitches and service issues but an existing franchise will have already encountered these issues and will have implemented practices and procedures to overcome them.

4. Franchisor support

It is in the interests of the franchisor to have every franchise operating successfully. The franchisor will benefit through increased commissions and marketable franchises. To this end the franchisor will provide support to the franchisee by way of training and guidance with the aim of increasing sales.

5. It suits someone with little business experience

For someone with little business experience buying into a franchise business can be a worthwhile venture. Every facet of the business should be discussed in the operating manual and that person will very quickly learn about the things that make a business successful, among these:

  • customer satisfaction;
  • marketing,
  • robust bookkepping; and
  • preparing and implementing a good business plan.

Other franchisees in the group may also be amenable to sharing their experiences and passing on their wisdom.  In larger franchises there are often franchisee groups or committees.

Franchises – The Bad

1. The business doesn’t belong to the franchisee

The franchise agreement will be for a set term, say 10 years, with a right of renewal for a further term. Once the term, including the renewal term, has expired the franchisor is under no obligation to extend the term. This can be very distressing for a franchisee who has put a lot of time, effort, and resources into the business over a long period of time. There will no doubt be an emotional attachment to the business but really, the business has always belonged to the franchisor. The franchisee has, in effect, only been “leasing” the business for the duration of the agreement.

2. The franchisor controls the business

In order to be successful every part of the business must be standardised. In theory a Big Mac purchased at any McDonald’s must be exactly the same. Customers know exactly what they will be getting and keep coming back for that product. The product is tested and perfected and should be the same wherever it is purchased. This can be a difficult concept for a franchisee with a creative streak who feels the product, or its delivery, can be improved in some way. The freedom to tinker with the business is not an option for franchisees.

3. Exclusive territories

Most agreements will stipulate a geographical area in which the franchisee can operate. This means the franchisee can only operate in a limited market and pitch to a specific number of potential customers.

4. Reputation of the franchise

A franchisee relies on the other franchisees in the group to do the right thing. Negative media reports will affect all the franchisees. For example, a case of food poisoning contracted as a result of poor hygiene practises at a fast food outlet will be widely reported and all the franchisees will feel the effects. The public will associate this incident with every franchise in the group and business will suffer across the board.

5. Restraint of trade

Franchise agreements will contain a restraint of trade clause which prevents the former franchisee from working in that field for a specific period of time in a specific geographical location. There may be a question as to whether the scope of the particular clause is enforceable but, in essence, the former franchisee will need to find alternative employment which does not compete with the franchisor’s business. This can be very hard for someone who has spent the last 10 to 20 years of their working lives in the same industry and may not be qualified to do anything else.

A franchise may or may not be the right choice for someone wanting to purchase a business. As with any business decision the good parts and the bad parts need to be considered carefully.

For further information please contact Danny Beger on 8362 6400 or email Danny BegerJoin our mailing list to receive updates and advice on current issues.

  • Danny Beger

    About the author: Danny Beger

    Danny advises on business transactions, trading structures, commercial documentation and estate planning issues. He has a wealth of business, commercial and property transactional experience.

    With interests in business and different types of property, Danny understands the issues that confront his clients, their businesses and investments.

    Call on 8362 6400 or .

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