Section 1: Starting a Small Business

The Advantages of Franchises

Why would a person consider purchasing a franchise rather than starting a business from scratch? Here are seven reasons for them to do so.

Probably the biggest advantage of having a franchise is being able to benefit from a well-known name. Customers expect to receive the same type of products and service at each location and this assurance is an important factor in consumer loyalty.

The second reason is that owners will have access to expert advice. Under the watchful eye of the franchiser, the franchisee can develop the necessary skills and gain experience on the job to be successful.

Thirdly, some franchisors help the new owner with finances. They may lend the franchisee money or help the franchisee get a loan from a bank. The association with a well-known company can often make it easier to obtain financing.

Fourthly, a franchisee is able to receive assistance with important considerations like the location, layout and design of the franchise. People who have not managed a business are less likely to know much about setting up efficiently designed premises for displaying merchandise or serving food.

The fifth advantage is related to quantity buying. Franchisors buy goods and supplies in huge quantities and sell them to franchisees at a reasonable price.

The sixth reason deals with the advantage of training. Franchisors have a staff of experts in each area of operating a business. For example, fast-food franchisors provide experts to train counter and kitchen personnel.

Last, but not least, franchisees can take advantage of advertising campaigns. Many franchisors spend hundreds of thousands of dollars on provincial or national promotions. They also sponsor local community charity drives, sporting and cultural events, and school programs.

The Disadvantages of Franchises

Although franchising offers many benefits, it can also be a source of problems. Let us consider four such disadvantages.

Number one is the fact that the owner is not really the boss. The franchisee does not have the total freedom of sole-proprietorship since they need to follow established procedures. They are also required to purchase nearly all supplies from the franchiser, even though the owner may find better deals elsewhere.

The second disadvantage is that the owner has to pay for the use of the franchiser's name. In most cases, the fee is a percentage of total sales. Although the average is 4 percent, it can be as high as 18 percent in some cases. The franchiser gets this percentage even though the franchisee's expenses may be higher than sales.

Another disadvantage is that the owner is required to follow established operating procedures. Owners usually need to write many reports and send them to the company. This can be very bothersome and irritating to someone who dislikes paperwork.

The last major disadvantage is that other franchises can hurt business. While an owner may be happy with the franchise's good name, the business may suffer if there are problems at other similar locations in the area. If one franchise gets a reputation for poor service or unsanitary conditions, the public may come to believe that the same will be found at all locations.

Not all franchise businesses are successful. The challenges are similar to those that cause independent owners to fail: poor location, too much competition, lack of customers, weak promotions, poor management, or a combination of these factors.