Tuesday 26th of November 2019
Several entrepreneurs in the United States have adopted the franchising business model to enhance... the reach of their brands and build a legacy that...
Several entrepreneurs in the United States have adopted the franchising business model to enhance the reach of their brands and build a legacy that continues to prosper. Dozens of successful franchises originating in the country have become well-recognised global brands and dominate industry markets. The rewarding nature of the business model makes it highly appealing to business owners looking to expand without dealing with the hassle of running multiple businesses singlehandedly.
Thus, franchising has become a highly sought-after growth prospect among expansion-seekers. The franchising business model helps entrepreneurs acquire a readymade business and use the products and intellectual property of the franchisor in exchange for a fee. Although the arrangement seems perfect, it comes with its pros and cons. Here is a list of the advantages and disadvantages of franchising as a business model that will help you make an informed decision. This information will help determine whether you are cut out for franchising or not.
Advantages of Franchising as a Business Model
Franchising is considered a high returns opportunity because it comes with a plethora of benefits besides making you your own boss. Let us look at them.
1. Proven Business Model With Existing Policies
Franchising involves replicating a successful business model to create new units that are run independently by different franchisees. These are low-risk businesses because they are based on an established formula with a track record of high profits and stable cash flow.
Thus, budding entrepreneurs looking for a business for sale in the United States seek franchise opportunities to reduce their risk of failure as a beginner in the industry. Franchise businesses come with proven policies and processes and require no planning or ideation, making them ready for success.
2. Ease of Securing Financing for Franchise Business
Usually, start-ups find it challenging to get business loans from banks because financial institutions are not sure about the financial projections showcased in the business plan. However, when it comes to securing funds for a franchise, moneylenders and banks are willing to offer most of the purchase price because it is an established brand and can manage risks and uncertainties.
Also, some franchisors offer seller financing, wherein the franchisor offers a business loan to the franchisee. Thus, the franchisee makes the monthly payments with interest to the franchisor instead of involving a bank, which is time-consuming and requires a lot of paperwork.
3. Instant Brand Recognition and Marketing Support
Franchise businesses are reputable brands that are known to the target audience and are quickly recognised. They have satisfied customers with their products and have substantial demand in new markets, which leads to the creation of new sites. Thus, when franchisees buy an existing franchise, they do not have to spend time, money and energy on building a brand.
The franchisor takes charge of marketing the business as a group across locations to attract new customers. They have company websites with information about locations or dedicated sites for each unit. In addition, they provide the franchisee with marketing materials for in-store branding, signage and local marketing.
4. Existing Customer Base and Exclusive Territory
A franchise business has a built-in customer base that is ready to buy its products. Since the brand is well known and its products have satisfied customers for a while, franchisees can start earning from the day they launch the new unit. It becomes easier to beat the competition because of the strong brand identity and high recall value among the target audience.
Also, franchisors provide protection from other franchisees in the network by offering exclusive territories. They demarcate geographical areas where only one franchisee can operate and do not allow any new sites to be established in these regions.
5. Comprehensive Training and Ongoing Support
Aspiring entrepreneurs who purchase a business for sale in the United States may find it hard to settle into their ventures and absorb the processes. However, with a franchise, it is a cakewalk because the franchisor provides hands-on training to franchisees to prepare them for the operations and management of the new site.
Besides training them, they also provide ongoing support to help franchisees overcome challenges that can impact the business. Since the income of the franchisor depends on the profits generated by the franchisee, they make every effort to make them successful.
Disadvantages of Franchising as a Business Model
Franchising is hailed as the easiest way to become an entrepreneur. However, it has a few drawbacks that must be known to potential franchisees. Let us look at them.
1. Initial Franchise Fee and Ongoing Costs
Franchisees must keep paying for the business they own even after purchasing it. They need to pay royalties to the franchisor for using their intellectual property and products. In addition, they have to pay marketing funds regularly as their contribution to the brand promotions done by the franchisor. They also have to shell out training fees to get trained for the job or get the staff members trained by the franchisor. These costs can become annoying for franchisees, who may not be making high profits.
2. Limited Control Over the Franchise Business
Although franchisees own the unit until the franchise agreement is terminated, they do not completely control the operations. They have to follow the terms and conditions mentioned in the contract and maintain standardised operating procedures. They must follow the brand guidelines while marketing the business locally and adhere to the franchising laws and regulations in the USA.
The franchisees must act in good faith and maintain their relationship with the franchisor. Since they are merely sticking to the parent brand's policies and procedures, they are not free to showcase their creativity and innovation. They cannot make any changes to the existing processes. They can only offer suggestions to the franchisor, who may or may not implement them. Franchising may feel restrictive if the franchisee is not good at taking orders or working with someone else.
Franchising is advantageous if you are ready to get into the shoes of someone else. It can help you kick-start your entrepreneurial career without hassles and risks. However, if you want to do everything independently, starting up is a better choice.
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