Pros and Cons of a Franchise Agreement
Before Turning into a Franchisee, Understand All Terms Thoroughly
Aug 25, 2009
According to the U.S. Small Business Administration, around one-third of all new businesses do not last beyond the first two years. 44% of new businesses make it to the first 4 years and 31% of new businesses make it to their 7th year. These figures were calculated up to 2007, i.e. before the arrival of recession. This indicates that new entrepreneurs now face a tougher time in surviving the first couple of years more than ever before. However, there are several ways to increase the probability of survival and franchising is surely one of them.
A franchise agreement can offer a new business to ride on the back of a successful formula by simply replicating it in their new venture. Corporations such as Pizza Hut and Burger King have inspired many small and medium businesses to tie up with these powerful brand names and start earning that all-important revenue from day one. However, there are two sides to such an agreement and one should carefully inspect all aspects before signing on the dotted line.
PRO-Getting Linked to an Established Brand Name
The biggest advantage that any entrepreneur gets by signing a franchise agreement is that his/her name gets instantly linked to an established brand name. This eliminates the tough effort required in establishing one’s personal brand name in the face of intense competition. A start-up company can expect a reasonable amount of footfalls from the first day of business unlike any other new businesses that might have to wait for weeks or months for accumulating a similar amount of business.
PRO-Purchases in Bulk
Since all purchases would be done in bulk by the parent company itself, franchisees have an added advantage of lowered costs, which translates into higher profits. The new business does not have to engage in trial-and-error methods to seek out the perfect vendors and suppliers since that aspect would be handled by the parent company.
PRO-Exclusive Area of Operation
The newly-opened business will also be able to operate without fear of another franchisee of the same company opening up within the same area. The owner can now concentrate on running and improving his/her operations although branches of other corporations could offer some competition.
CON-Initial and Continuous Payment of Fees
The franchisee would need to pay franchisee fees, which could be quite large, depending on the brand name and other terms and conditions. In addition, the start-up company would also have to pay royalty fees on a regular basis as long as the agreement is in place. These fees could drain the finances of the new business initially and also at regular intervals, and this money would be permanently lost if the venture failed to survive.
CON-Franchisees are bound within a Contract
Any new franchisee would need to sign on an agreement that would prohibit it from taking decisions on its own. Each decision would need to be approved by the parent company. On the other hand, the parent company too might make regular decisions that would have to be enforced by all its franchisees, irrespective of whether they like it or not. This could prove to be a damper on any entrepreneur that might want to take independent decisions.
CON-Future of Franchisee Linked with Franchisor
In these fast-moving times, the new branch might quickly establish itself in its own area of operations. However, if the parent company gets into deep financial trouble then the future of the franchisee too could be in trouble. All the effort, money and time spent in establishing a successful franchisee could come to naught if the parent company collapses due to any reason.
There are distinct advantages in taking the franchisee route if an entrepreneur wants to quickly start a new business. However, the pros and cons of such a move need to be carefully examined before taking such a crucial decision since the initial finances required could be huge. In other words, the risks and rewards associated with a franchise agreement are usually quite high.
 |
