SOME PROS AND CONS!
FROM THE FRANCHISOR’S POINT OF VIEW (E.G. MCDONALD’S)
Pros:
- The company can expand very rapidly by franchising out a number of stores at the same time without committing large sums of money towards fitting out and refurbishing each store as it becomes available.
- The Franchisor must supply ongoing marketing support but once a store is set up it receives a valuable income stream of between 4-6 % of sales without any further input or contribution towards the cost of those sales.
- The Franchisor usually insists on the same store layout and hygiene plan and staff structure in each store so that standards are more easily maintained, the public know exactly what to expect and their investment is protected.
Cons:
- The Franchise Agreement for the larger Brand companies tends to be tilted somewhat against the Franchisee with the result that disputes over sales targets, menu changes and marketing support can arise quite frequently.
- As the stores are being run by the Franchisee and not by the Brand company itself, the Franchisor can often feel aggrieved at the loss of control over the running of the store.
- The royalty payments can be delayed or stopped by the Franchisee in a dispute and arrears of royalties can be difficult to collect.
FROM THE FRANCHISEE’S POINT OF VIEW.
Pros:
- It is easier to obtain loan finance from a bank when the retailer is linking up with a major Brand name.
- It becomes easier to fit out the shop as the Franchisor will supply architect’s drawings and other specifications.
- You receive marketing support and other feedback from the Franchisor.
- You are buying in to a known and established product or service where the demand is already there.
Cons:
- You have to pay an upfront Franchise fee which can be considerable where the Franchisor is an internationally known brand. You also have to fund an expensive fit out.
- You are restricted to selling only the items covered by the Agreement.
- The royalty payment can be a drag on cash flow if sales are flat.
- You may be restricted by the Agreement as to how many stores they might allow you to operate.
Summary: Risk can be minimised under a Franchise, but caution is advised. Talk to other Franchisees about their experience and ask your solicitor to bring you through the draft Franchise Agreement before you take it any further.
• Please note that this article is prepared for general information purposes only. It is not legal advice and should not be taken as such.
