Franchising has become an increasingly popular business model in Australia and a growing number of aspiring business owners are seeking advice on whether they should opt to buy into a franchise or start a new brand themselves.
While most people are familiar with the concept, a franchise is a business model where a franchisee pays and upfront and ongoing fee for the right to operate under the brand name of the franchisor.
Often the franchisee also gains access to the franchisor’s systems, supply chains, sales enquiries, training and other assets and services. There are clearly some benefits to buying into a franchise, but there are also some disadvantages to be aware of and we will examine some of each.
Advantages of Buying a Franchise
Proven Business Model: One of the significant advantages of buying a franchise is that the franchisee will be buying a proven business model, although this is no guarantee of success.
The franchisor and possibly other franchisees have already tested and refined the business model, so the franchisee can avoid the challenges and mistakes of starting a new business from scratch. This means that possibly the franchisee has a higher chance of success and profitability.
Established Brand: A franchisee can benefit from the established brand recognition.
A well-known brand can attract customers and generate sales, which can take much longer for a new business to achieve. Customers are more likely to trust and purchase from a recognisable brand, and this can give the franchisee an edge over its competitors who are launching new brands in competition.
Support from Franchisor: A franchisor should offer ongoing support and training to its franchisees, which can be invaluable to a new business owner.
The support can include initial training, marketing and advertising, assistance with site selection and lease negotiation, and ongoing operational support. The franchisor may also provide regular updates to the franchisee about the latest industry trends, technology, regulations, and marketing strategies, among other things.
Economies of Scale: A franchisee can benefit from economies of scale when purchasing products and supplies.
The franchisor can negotiate better deals with suppliers due to their size, and the franchisee can take advantage of these lower prices. This means the franchisee can access bulk purchasing discounts on supplies, equipment, and inventory.
Disadvantages of Buying a Franchise
Cost: The initial cost of buying a franchise can be expensive. A franchisee must pay an initial franchise fee, which can range from tens of thousands to significantly more, depending on the brand and industry.
The franchisee must also pay ongoing royalties and other fees to the franchisor, which can significantly impact profitability. It may also be necessary to pay the cost of leasing or purchasing a storefront and outfitting it to the franchisor’s standards.
Limited Flexibility: A franchisee must operate the business according to the franchisor’s system and rules. This means that the franchisee has limited flexibility in making decisions and running the business.
The franchisor may dictate the products and services offered, pricing, marketing strategies, and even the store’s layout and design. This lack of flexibility can be frustrating for some franchisees who want to make changes based on their experience in their local market.
Dependence on Franchisor: A franchisee is dependent on the franchisor for ongoing support, training, and marketing. If the franchisor fails to deliver on its promises, it can significantly impact the franchisee’s success.
The franchisee must also adhere to the franchisor’s systems and rules, even if they are outdated or ineffective. If the franchisor fails to adapt to changes in the market, the franchisee downstream may suffer.
Risk of Unethical Behaviour by the Franchisor: A franchisee is at risk if they have purchased a franchise from an unethical franchisor. It is not unknown for franchisors to oversell franchises in particular areas which limits the ability of each franchise to grow.
In some industries, it is also not unknown for the Franchisor to seek to take over successful Franchises while leaving the less successful territories in the hands of independent owners.
Buying a franchise in Australia can be a rewarding and profitable business venture. The advantages include a proven business model, established brand, support from the franchisor, and economies of scale.
However, the disadvantages of buying a franchise include potentially higher costs, lack of flexibility, dependence on the franchisor and risks associated with unethical franchisors.
If you have a question about starting a business or running your existing business, we’d love to hear from you because we’ll select a new question to answer here every two weeks. You can submit your question to james@qsb-consulting.com using the subject ‘CQToday’.
