If you have decided to start a restaurant franchise, it is imperative to know about the terms and conditions and weigh all pros and cons for both franchisors and franchisees. This article also shows you the benefits and disadvantages so that you know if venturing into a franchise is the right decision for you or not. Before that, learn what a franchise is.
Franchising or franchise is a process of distributing services or products belonging to a franchisor who sets the brand’s trade name, a franchisee, and a business system. The franchisee agrees to pay a sum to the franchisor as royalty and sometimes an initial fee for the permission to conduct business under the system and name of the franchisor.
Terms and Conditions
Intellectual Property and Trademark
The franchisee gets the right to use operating manual and software systems. He can use the franchisor’s name, service marks, trademarks, slogans, logos, and other branding signs. For example, franchises of KFC all over the world.
The franchise document lays down the contract’s time period. Usually, such agreements are long-term with a minimum of a decade and a maximum of two decades as long-term contracts are beneficial for both franchisors and franchisees. One such benefit is the chance to protect the investment made behind an expensive venture.
The parties can also extend a 10-year term for another ten years.
Training and Support
The franchisor is obliged to train and offer support services to the franchisee. This training starts before the contract commences and lasts for as long as the collaboration exists. For instance, McDonald’s offers training to a range of franchise employees like restaurant managers and crew members.
Written and Signed agreements
Any agreement between two parties should be signed by both parties involved. Despite being rare, handshakes or oral agreements do occur in franchising. But, owing to the lack of credibility, obligations, and rights are unclear.
Every franchisee chooses its preferred site. But, the franchisor can select the location and has the right to choose the standards for creating the premises like opting for the right furniture, upholstery, fixtures, landscaping, upholstery, and signage.
All franchisees have to pay a franchise fee at the start and then follow that with marketing or advertising fee, monthly royalty fee, and any other fee. The franchisee may have to pay for training its employees and their travel expenses during the training.
What happens when the franchise agreement expires or terminates early? The document will state what the parties must do to unwind the business relationship. Usually, this consists of a long list of specific obligations for the franchisee. These include the obligation to stop using the brand name, take down signs, return the operations manual, and pay all amounts.
Advantages of Franchise
One of the biggest pros of franchising for the franchisee is the business help the franchisor gives them. While some franchise agreements let franchisors provide franchisees with supplies, brand, equipment, and advertising plan, others may not offer everything. However, all franchisors provide insight and know-how into running the business. This may be in digital form, a handbook, or a call. Franchisees find this assistance helpful as they do not have to learn everything from scratch and have a helping at every step.
When you begin a venture, you have the onus to create a customer base and build a brand from the initial stage. Both take a lot of time. But, this does not happen in the case of a franchise business as the franchisor is an already established entity. As a result, your target customer is aware of your business and the quality as well as offerings to expect. If you think of starting a Subway franchise, you do not have to ponder ways for attractive advertisements. Just a company hoarding will be enough to bring you customers.
The size of the business determines the cost incurred and franchisees enjoy the advantage of having a large network. Imagine you want to manufacture products and need raw materials. Your order will be comparatively smaller than a large business with franchisees. On the contrary, by being a franchisee, you can enjoy discounts that benefit the franchisees and eventually lower the cost of the final products.
Chances of failure are bleak when you join a network as the brand is well-known, and you always have the network’s support. You will hardly go out of business as target customers know your offerings, and you are aware that the services or products you offer are in demand.
You may have to invest a high amount, but you will definitely get back a high return. Also, profits are higher in franchisees than in standalone ventures as the former is popular.
A great benefit of owning a franchise is that while you have autonomy over your career, you receive full support and knowledge from the franchisors.
Disadvantages of Franchise Network
High Initial Expenses
Even though the return on investment is high, the initial investment is not very pocket-friendly. This is all the more true for established brands, and small-time business owners may find it difficult to garner such a hefty capital. However, the good thing is, you can opt for franchise financing options to support your initial endeavor.
The costs do not stop at the initial investment. You have to constantly pay for things like maintenance of the entity, training, advertising costs, and royalty fees. It is better to add these expenses and others in the agreement to avoid issues in the future.
Lack of Freedom
A franchisee maybe the boss of his business, but he has to work and operate his entity according to the opinions of the franchisor and the policies mentioned in the franchisee agreement. The franchisor can control a number of things of a business depending upon the agreement like timing, holidays, layout, decor, locations, and more. This is done to maintain homogeneity among the various franchisees.
High Chances of Conflict
No matter how good the business relationship is, conflict of interest is bound to occur when one of the partners has a high position. In most cases, the franchisor has the last word. For a franchisee to act against the franchise agreement, the stakes are high as it has to spend a lump sum in legal battles.
Some franchisors screen potential franchisees to check their management style and this gets irritating for franchisees at times.
In the past, franchisees have closed down due to such conflicts. The closing down of about two-thirds of KFC outlets in the United Kingdom because of lack of chicken is an example. KFC had entitled the rights to supply chicken to a company with a single location. When issues emerged in that area, several outlets suffered and as a result, there was a temporary lull.
Low Financial Privacy
You will indeed get ample financial assistance and guidance by sharing your financial transactions. But, as a franchise owner, you may sometimes feel your autonomy curbed and financial information revealed. But, if you consider that as a path to guidance, it should not be a problem.
Advantages of Franchise Network
Growth and Expansion
Starting a business is time-consuming and expensive. If, after opening one venture, you wish to open another branch in another location all by yourself, it will not be time-or cost-efficient. However, if someone shares your burden, the business gets easier to set up and handle. Therefore, you can conveniently spread the business in different locations without having to spend much money or time.
Despite the initial cost of starting a business, a franchise network gives you access to a lot of capital to start your next venture and expand efficiently. While you can take loans that are not always useful as you have to return the money with interest, a franchise business allows you to collect capital from franchisees without you having to invest much in it.
The amount of risk is also low with franchises as the franchisee owner puts his name on the agreement as the owner of the branch.
Enhanced brand awareness is one of the advantages of a franchise network. With a high number of locations, you will be noticed by a large number of people. As people start loving your products and services, your business gets more successful and you earn more profits. This situation is not only beneficial for franchisors but also for franchisees.
Least Employee Supervision
Hiring and managing employees is considered one of the biggest stresses of owning a large business. Franchisors, however, do not have to handle such pressure because they do not have to train individual employees. They only have to train franchisees. As the franchisor does not have to invest time in monitoring employees in various locations, he can focus on the business’ growth and not spend hours looking after the daily operations. In such cases, checking whether an employee turns up on time becomes the franchisee’s responsibility.
Disadvantages of Franchise Network
High chances of legal conflicts
You have to be ready to handle conflicts and legal disputes when you sign close business partnerships. A well-prepared and lawyer-approved franchise agreement can save you from many a dispute with franchisees, but such conflicts may still arise. Settling them out of the court or through it is expensive and time-consuming, which can take a business through difficult times. The Tim Hortons franchisee dispute of 2017 caused the company huge losses.
Lack of Total Brand Control
Usually, business owners have full control over their ventures. However, in the case of franchises, the franchisor has to let go of the control. It is true that the franchise agreement decides a number of ways in which the franchisee will operate the business and the ways have to be approved by the franchisor, but how the franchisee will govern the business depends on him. These franchisees will act differently from you, which can be deteriorating for your venture.
Huge Initial Investment
People are always concerned about the initial investment incurred by franchisees. But, there is hardly any discussion regarding the expense suffered by franchisors. The truth is, the start-up cost of the franchisor is huge and you have to make sure to use it rightly.
Government Rules and Laws
Franchisors find dealing with government regulations difficult and a nuisance. But, they are made to ensure the franchises work fairly. However, the time and effort you have to give while meeting these regulations is back-breaking.
Like all business decisions, it is wise to decide if the franchise would be right for your business or not. Weigh its advantages and disadvantages to understand if you want to be a franchisor or a franchisee.