Overview of Franchising
Franchising is a method of distributing products and services based on a brand and customer recognition. Among other things, a franchisor will grant a license to a franchisee for the use of the trademark or the trade name for a specific fee. The franchisee is then able to use the franchisor’s business name and the operating system to set up their business. The franchisee is required to pay the franchisor a specific amount, better known as royalty, which is usually based on the sales of the business. Typically, the franchisor will draft a franchise agreement to be signed by the franchisee that includes details on how the franchise should operate. As such, pros and cons arise from opening or buying a franchise.
Pros to Opening/Buying a Franchise
The following is a list of pros which may apply when opening/buying a franchise:
- Turnkey system – it is a proven system for operating a business and providing the particular goods and/or services
- Franchise support –unlike starting your own business where you may have little to no support, a franchisee receives support from the franchisor including guidance on how to setup the business, which suppliers and other partners to utilize, etc.
- Brand name – a profitable franchise with market awareness can reduce customer acquisition costs (marketing) which allows for the franchisee to have more time to operate the business and help obtain customers at a quick rate
- Lower inventory prices – as a collective group of franchisees with a high bargaining power with suppliers, each franchisee may be able to benefit from lower costs in purchasing inventory and/or equipment
- Staff recruiting –a franchise that has a recognizable name will typically have a greater recruiting pull than other types of businesses
- Idea generation – a franchisee does not have to generate a new idea for a business and can rely on the marketing and development of the franchisor, including new products, recipes, etc.
- Supply chain – an established supply chain is in place through the franchisor (reliable suppliers, contractors, etc.). Usually members of the supply chain will make sure they adhere to high standards in order to stay affiliated and recommended by a franchisor
- Profitability – a successful franchise and brand can lead to high profits for a franchisee
- Banking – some franchises may have a positive relationship with banks which will enable easier access to capital
Cons to Opening/Buying a Franchise
The following is a list of possible cons to opening/buying a franchise:
- Startup costs –a brand name franchise may be beyond the financial capability of some franchisees as the fees to startup are based on many of the pros mentioned above, in order words, you are paying for the pros (brand name, support, franchise fee, etc.)
- Royalty payments & Advertising – a franchise has ongoing costs in the form of royalties and advertising funds which are paid to the franchisor every year in return for support in operations and advertising
- Less flexibility – franchises all operate in the same manner with little to no room for idea generation and implementation from each franchisee, you must adhere to the rules
- Costly purchase – the more successful that a franchise is and higher chance for reward (profits), the more expensive it will be to purchase
- Franchise location – the location is at the discretion of the franchisor as you may not be allowed to open your location in certain areas due to protections provided to other franchise locations
- Privacy concerns – it is mandatory for franchisees to share financial information with the franchisor
- Inadequate support –there may be instances where some franchisors do not provide all the required resources to operate a successful franchise, training or mentoring services yet the franchisee has paid a high price with the need for support and the operation of the business is still very regulated
All of the pros and cons should be considered before an individual decides to pursue a franchise.
Vellani Law is a law firm specializing in providing prospective franchisees with all requisite legal advice required to either open up a new franchise or purchase an existing franchise. From reviewing franchise agreements and disclosure documents, to helping negotiate terms and conditions with the franchise, to reviewing leases and setting up your company, Vellani Law provides tailored services to prospective franchisees. Additionally, Vellani Law can help you with the purchase of a master franchise agreement and the implementation of your franchise system as dictated by the master franchise agreement. As such, we can help provide legal advice regarding the franchisor and the franchisees.
Vellani Law helps clients from Hamilton to Toronto and all areas in-between.