What are the disadvantages of franchises? Franchising is an excellent way to start a business but it's far from perfect. We discuss the disadvantages of franchising and franchise ownership.
While there are many benefits to owning a franchise, there are also some drawbacks that you need to be aware of before you commit to becoming a franchise owner yourself.
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These drawbacks aren't necessarily "deal-breakers". Rather, they are things you need to consider and be aware of in advance.
If you've done any research at all, then you're probably already aware of one of the drawbacks of owning a franchise – cost. Buying into a franchise is not cheap. The initial cost of a franchise can be $50,000 or more on top of the cost of equipment, inventory, and business space. Also, franchises frequently require their franchisees to pay ongoing a percentage in royalties or franchise fees. You receive benefits in exchange for these costs, but at the end of the day they are still additional expenses that you need to know about.
Another potential drawback of owning a franchise is that franchisors place a number of restrictions on their franchisees. These restrictions can take a variety of forms including limitations on products, pricing, employee performance and policies, territory, marketing, and other areas critically important to the success of your business. Sometimes these restrictions can seem burdensome, but overall they can be good for your business because they ensure uniformity across the franchise.
"Guilt by Association"
Name recognition is widely seen as one of the major benefits of franchise ownership. However, name recognition can also be a hindrance to your business, particularly if the other franchises or the franchising company itself is receiving bad press or suffering from a poor public perception. For example, your franchised restaurant can be the best meal in town, but still suffer because a franchised operation halfway across the country was implicated in a food poisoning fiasco. Your best protection against this is to make sure your franchisor has a time-tested and solid reputation within the industry.
Limited Growth Potential
Unlike a typical small business, the growth potential of franchised operations is limited by a couple of factors. First, most franchisors impose territorial restrictions on their franchisees. This limits the franchisees ability to market or sell outside of a clearly-defined geographic area. If you are in the restaurant business, this may not seem like a big deal. But if your franchise sells consulting services, it can make a big impact on your plans for growth.
Another factor that limits the growth potential of franchises is that franchisees can't franchise! When it is time to expand, many small businesses look to grow their operation by franchising themselves or adding on additional stores in different areas. Franchisees relinquish their ability to do this and may even be unable to expand to surrounding areas by purchasing another franchise due to the territorial rights of other owners within the franchise.
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