Most people are vaguely familiar with business franchises – if not least from seeing the fast-food outlets everywhere they go! Franchises are a specific business organization that may be a good fit for first-time business owners or established operators looking to expand.

What Is a Franchise?

A franchise is a business model which involves both a franchisor and franchisee. A franchisor is the original business owner who grants a license to use the business trade name and logo in exchange for a fee from the franchisee. This use is set out in a franchise agreement. 

Advantages of Buying a Franchise

Buying a franchise offers a number of potential advantages over starting a business from scratch. 

Reduced risk

Generally, franchises have a higher rate of success and may be seen as less risky than other new businesses. This is because they come with the support of an established business that has already addressed things like location choice, design, and construction. As these business models have often been tested and refined over time, franchisees benefit from the expertise and experience of a larger company. 

Financing & licensing

Securing financing for a franchise can be easier given the reduced risk. In addition, licensing and start-up fees for a franchise might be less than what might be required to start a comparable business as a non-franchisee.

Less business experience required

Franchises usually require less experience than is needed to successfully start a new business without support. In many cases, training is provided by the franchisor.

Established brand recognition

Buying a franchise allows franchisees to work with an established brand, which can be invaluable in attracting customers. Depending on the size and recognition of the franchisor’s brand, franchisees may also receive access to national advertising campaigns.

Advantages of Franchising an Existing Business 

Businesses may consider franchising as a method of expansion. This offers a number of potential advantages, including:

Easier access to expansion capital

Franchising can help an established business secure expansion capital with reduced risk. Franchisors can reinvest capital generated from franchise fees to further develop the business as a whole.

Motivated franchisees

  • Motivated franchisees: In many cases, ambitious and talented people are more inclined to own a business rather than simply work for one. As franchisees also have “skin the game”  they are highly invested in its success, meaning they tend to work hard.
  • Helps keep your operation lean: because franchising leaves the responsibility of such things as hiring and managing the workforce at a particular location to the franchisee, you do not have to bear these costs or management burdens.
  • Quicker growth: since franchising leverages the capital and resources of franchisees to run locations at arms-length, you can multiply your locations at a faster rate than if they were all being centrally managed. 
  • Local acumen: if you are expanding in different communities, local franchisees will tend to have both existing business networks and a better understanding of the local market.
  • Reduced risk and responsibilities: with franchisees, you have a business relationship that allows you to share risks and liabilities, and an owner-operator highly invested in the success of the overall business.

Potential disadvantages of buying a franchise

  • Lack of independence and creativity: As a franchisee, you are entering into a legally binding agreement with the franchisor. This means you are not “going in alone” and in many cases will have to defer to the franchisor’s conditions and ways of doing things. 
  • Other restrictions: in addition to how you operate, there may be restrictions on where you may operate and your products and suppliers.
  • Reputational damage: just as you can benefit from a good brand, you can be hurt by a bad one. Poor performances by other franchisees may also affect your own franchise’s reputation.
  • Less profit: don’t forget that you are paying for all those franchise benefits by paying a portion of your profits to the franchisor!
  • Uncertainty: franchise agreements end – and in most cases, franchisors are not obligated to renew it.

Potential disadvantages of franchising your business

  • Up-front costs: establishing a durable franchise system requires some investment in setting it up, including in such things as a proper franchise model, creating an operations model and training program, a clear and effective compliance regime, advertising materials and developing a sales and marketing team. 
  • Loss of control: while as a franchisor you retain some control, it is not total, and many business decisions will now be in the hands of others.
  • Difficult franchisees: challenging franchisees may come in many varieties. Even if they are successful, some franchisees may not appreciate that their success is not due solely to their own efforts. Other franchisees, especially those who are less successful, may complain about perceived injustices or unfairness. These franchisees consume a disproportionate amount of your time and resources to properly manage.
  • Less Profit: successful franchise systems have motivated franchisees who can do well for themselves, meaning franchisors must sacrifice some of their profit that they would otherwise retain if all locations were company-owned.
  • Clashing personalities in the system: franchisees come in a variety of personalities and will often be competitive with one another. In many cases this can be healthy, but in other cases where franchisees have different goals or priorities, it can make it challenging to get them all pulling in the same direction for the benefit of the overall business.

Do your homework and consult with the experts!

As the above pros and cons make clear, while franchising may be the right choice for many business owners, it isn’t foolproof or without its drawbacks. To make sure franchising – either as a franchisor or franchisee – if right for you, be sure to consult an experienced lawyer who can help you understand what you are signing up for. 

Contact the Corporate Lawyers at Tierney Stauffer LLP in Ottawa & Arnprior for Advice on Business Law Matters

At Tierney Stauffer LLP, we provide comprehensive and forward-thinking advice to our business clients, no matter the size of the operation. We can help advise on everything from developing a business plan to registering a business name. Our business lawyers have extensive experience in business law matters, from real estate to licensing and business succession. Contact us at 1-888-799-8057 or contact us online to arrange a consultation today.

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