Though franchising is one of the safest routes to becoming your own boss, there are also disadvantages and drawbacks to franchising that you must be aware of when looking to buy a franchise business.
The three main areas are lack of independence, inflexibility and dependence on the franchise business.
These are not necessarily disadvantages as such but instead factors that may influence your decision with regards to if franchising is right for you. We will look at each in more detail.
Lack of independence
Every aspect of how to run your franchise business is outlined in your franchise manual, right down to who to use as suppliers.
Sticking to the manual allows little freedom to you to do your own thing.
Though initially you will welcome the support you receive from head office, including regular visits from the support team, but after time you may come to regret the “interference” and come to see it as a hindrance. You may want to take charge and do your own trouble shooting. After all it is your business.
You also pay franchise fees for the support you receive from head office, and again whilst this may be extremely useful at the start when you need help promoting your business and getting it up and running, as your business develops and you start to do well, you will start to resent having to pay the fees as it is your hard earned cash.
In franchising you are in business for yourself and not by yourself and though this can sometimes be a good thing, it may not always be welcomed.
Franchising can be an inflexible way of doing business for the franchisee as you are bound by the actions of the franchisor.
If the franchisor wishes to introduce change e.g. new pricing, new branding, new systems etc, you are obliged to follow suit whether you want to or not.
Also if there are changes in your local market e.g. state laws or new competition, that require you to change how you do business, your response to them maybe slower as you need to wait for the permission of the franchisor.
Or you may not be allowed to respond to them e.g. changing your pricing structure to compete with a new competitor in your area, as it would affect the overall franchise network.
Being bound by how the franchisor wishes to run the network as a whole means a lack of flexibility when it comes to some decisions.
The reputation of the franchise is dependent on the reputation and success of each franchisee. This means that if one franchisee does something that is unethical and as a result gets bad press, it could affect the reputation of the whole network. It in the most extreme cases it can take just one bad franchisee to have an undying affect on the business.
You can also have a wide gulf between the best and worst performing franchisee. And so whilst you are doing well, others may not be which could affect overall business for you as the more money a franchisor makes, the more support and promotion you will receive as a result.
As well as all being reliant on other franchisees, you are also dependant on the franchisor. And unfortunately not all franchises are good businesses or run well.
There are four different types of franchisors – established, new, unethical and incompetent. The one you choose will affect the risk you take.
The established franchisor
This franchisor is the least risky choice. They are well established with an increasing network and solid reputation. They have tried and tested the franchise throughout Australia to make sure that works in all areas. Though the risk is much less, the cost can be much higher! You pay for what you get, and with an established franchisor you are getting a tried and tested business with a good reputation. You are more likely to be successful in this type of business and have greater security.
The new franchisor
All franchises have been new at some point and so there is nothing necessarily wrong with buying a new franchise. The risk will be high as it is not established and so not too many indicators available as to whether it will work and be successful.
You need to make sure that you do your homework into the background of the company, who is involved in the company, what is their track record of running business, check out the franchisor, what is their experience in franchising, how was the franchise established, did they use a reputable franchise consultant and lawyer, and how successful was their pilot franchise, all good franchise systems will run a pilot system to make sure that their business can be run as a franchise. Be cautious of any that do not do this as it means it is untested.
Be wary that new franchisors can be wrongly drawn into selling franchises quickly in order to breakeven. Franchisors should be looking at the long term plan of the business and not about making money fast. Ask them what their plans are for expanding the business.
Ask about the support they will provide. Though they do not have franchisees and hence franchise fees coming in to pay for support, they should not cut corners on this area.
Overall be wary that a new franchisor may be tempted to cut corners to breakeven.
You should pay less as the franchise is not established and the risks high. Some people like this sort of risk whilst others would rather pay more for the security.
The unethical franchisor
This franchisor is the worst kind. They are only interested in making money fast and not interested in the long term interest of the business. They have no intention of running the business as a proper franchise only in making money by swindling gullible franchisees.
Unfortunately there are many of this type around and so you need to do your homework. Many will be obvious straight away others not so obvious.
They will set up a shell business i.e. it may look like a proper business but when you delve in deeper you will find that it is not. In order to identify if it is a proper business check out the track record of the business and owners. Who are they and want experience do they have. Also only successful businesses can be franchised, and so if they tell you the business started the same time as the franchise, then this is not an ethical franchise.
Also ask about their other franchisees and if they have any, get a full list of them so you can contact them independently. If a company gives you one or two people to speak to then be wary as they probably are their best performing franchisees and so not a true representation of the franchise business or maybe associated directly with the company and not actual franchisees.
If something sounds too good to be true then it probably is. Equally is something doesn’t seem right, it probably isn’t!
Research, research, research is the key to making sure that you can spot a bad franchise. Do not get carried away with the dollar signs and promises of making money, do you homework and take your time doing it.
The incompetent franchisor
This franchisor is not deliberately trying to sell you a bad franchise business, they are just incompetent. Some franchisors may be enthusiastic about their business, which can rub off on those who want to know more about it, but they have little understanding as to how franchising works.
Some franchise businesses may not be profitable enough to make an adequate profit to make it worth your while buying the franchise, no matter how great the business sounds. This could be down to insufficient testing of the business to see if it can be run as a franchise. The lack of testing will be down to not knowing any better or not having sufficient funds. A good franchisor will test the idea out in various, or all, states in Australia and run a pilot franchise business to make sure that it can be run as a profit generating business. They should also carry the initial establishment cost of the franchise for at least two years before being in a position to look to generate a profit.
An underfunded business will mean poor start-up assistance, poor operating manuals, poor promotion, poor support etc. It becomes even more of a worry if you are planning to open your franchise a distance away from head office as this will mean even less support and assistance etc.
So no matter how enthusiastic the franchisor is, you still need to think logically at whether it is a business that can be run as a franchise and whether the franchisor can run it adequately. Knowing how to investigate a franchise thoroughly is key.