There are several advantages and disadvantages of franchising a business. This article explains them one by one. before I get into the full review, what does the term, franchising mean or what does it mean to franchising a business?
Franchising is defined as the practice of utilizing a brand for a given period with the intent of making profits. The proprietor of the business that is franchised is known as the franchisor while the individual or organization that gets a franchise is known as a franchisee.
Enterprenuer.com defines franchising as, “A continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offer assistance in organizing, training, marketing, merchandising and managing in return for a monetary consideration. Franchising is a form of business by which the owner of the business [the franchisor], service, or method obtains distribution through affiliated dealers known as the franchisees.
Popular examples of franchised businesses in Nigeria include Chicken republic, Tantalizers, Mr. Biggs, Total, Forte Oil, Mobil, ABC transport, Ekeson, Mc Donald’s, Tranex, Nobel, Oando, Samsung, Tecno, IPhone, Infinix among others.
I have a case study article that explains one of the above-listed forms of franchise in Nigeria – fast-food franchising. It shows step-by-step how to start a fast-food franchising in Nigeria. Get the article here.
Now, let’s continue.
Before you settle on what franchise you want to purchase, make sure that you comprehend or have a concrete understanding of the business and business model that you want to enter into. Choose a product that is highly demanded and spend time and energy to research on the product.Also, you should find out about the competition in the region and set sensible targets. Get a legal practitioner to look into the franchise agreement and hit the ground running rather than face the pressure and slip-ups of beginning a business off the ground.
In this article, I discuss some broad advantages and disadvantages which any intending franchisee considering a franchise agreement ought to take note of.
Advantages of Franchising a Business
(1) You Will Get Support from Your Franchisor
When you franchise a business, you stand a high chance of getting support from the franchisor. This support includes training, finance, funding, and discounts. Lack of support in dealing with public authority and other parties is one of the major problems that small business owners experience.
When your business is franchised, you will get a lot of support from the franchisor to deal with this. Also, you will benefit from the economies of scale from the bulk purchase of materials thereby significantly lowering costs for your new business.
(2) You Will Spend Less on Marketing and Branding
As the real brand has already spread its products, you will spend less or even nothing on marketing your business. You are saved from the stress of coming up with a Brand Logo Idea, Flyers, Banners, Television commercials and other forms of advertisement as the real brand has already done all these.
(3) Employing Staffs May Be Easier
Most top quality staffs prefer to work for an established brand. As such, they apply for jobs in these brands more than in new businesses. If you franchise your business, the name of the brand will attract these staff to apply for jobs thereby giving you the opportunity to enlist from the best among them.
(4) It Is a Tested and Trusted System of Business
Over the years, thousands of people have franchised their business and did well. For you to choose a company as a franchisor, that company must be well-known and successful. If you are frail in sales and marketing, at that point franchising is the most ideal alternative as there is an instant market from the brand name alone that you are franchising with.
Disadvantages of Franchising a Business
Like any other business, franchising has its disadvantages, although the advantages are by far more than the disadvantages. I will balance this discussion by telling you the disadvantages of franchising a business.
Below are some major disadvantages of franchising a business:
(1) The Start-up Capital is Expensive
Most franchises are very expensive particularly the more fruitful ones. Franchisors have norms and expect their franchisees to live up to them. From construction materials, machinery, raw materials, staff uniform, franchisors have high standards which the franchisees must live up to. For example, to set up a fast-food franchise, you need up to $750,000 which is equivalent to N285,750,000.
(2) You Are Mandated to Pay Stipulated Royalties
In return for the branding, advertising, and operations a franchisee has to make a yearly royalty payment to his franchisor. Irrespective of whether he benefits from these things or not, this royalty must be paid.
If the franchise is foreign, the payment must be done in dollars or any foreign currency of the franchisor company. This opens franchisees to exchange rates problems and devaluation risks as the Nigerian currency has never been stable.
(3) There is No Secret in the Business
As a franchisee, you have to keep your franchisor updated about your developments. Therefore, they know when you are doing well and vice versa and based on this information, they might take certain actions for or against your favour.
(4) Lack of Support
Though this is very rare, some franchisees suffer from lack of adequate support from their franchisor. This is because in some situations, brands decision must be taken to the head office before it is made or before approval is given. This slows down decision making.
(5) There is little or No Room for New Innovations
As a franchisee, you will be operating under a fixed template of the real brand. So if you like coming up with new ideas always, you better don’t opt for a franchise. In short, these are the major advantages and the disadvantages of franchising a business. Although there are other minor pros and cons, these are the major ones. By the time you have finished reading this article, I hope that you make a decision of whether to franchise your business or not. For a clear explanation on this concept, see by step-by-step guide on how to start a fast-food franchising in Nigeria.