Franchising: the advantages and risks of doing business under a brand

Franchising is a business model in which you use another company’s proven brand, product and procedures in exchange for fees. For many people it is a safer way into business, but it has its downsides too. Below, we explain how it works, who it suits and what to watch out for, so that you can make a level-headed decision. Let us look at both the advantages and the risks.

How franchising works

The provider (franchisor) grants the entrepreneur (franchisee) the right to run a business under its brand. You gain know-how, marketing, supplier relationships and an established system. In return, you pay an entry fee and, as a rule, ongoing fees based on your revenue.

The main advantages

The biggest advantage is that you are not starting from scratch. You take over a proven model that already works elsewhere, which reduces the risk of failure. Other advantages include:

• a well-known brand and ready-made customer trust,
• training and ongoing support from the provider,
• better purchasing terms thanks to the network,
• joint marketing and a uniform presentation.

Risks and limitations

On the other hand, you lose part of your freedom. You have to follow the network’s rules, from the product range and the look of the premises to prices. Your independence is limited, and the brand’s mistakes can harm you too. Costs are another risk – the entry and ongoing fees can be high and they reduce your margin. You also need to bear in mind that the network’s success in one town does not guarantee the same results in your area, where demand and competition may be different.

The relationship with the provider

The quality of your cooperation with the provider determines how well you will do. A good franchisor will give you ongoing training, marketing support and help with solving problems. So before you sign, check how it communicates with its existing partners and whether it stands by them in harder times too. References from current franchisees will tell you more than any promotional material.

What to watch out for in the contract

1. Study the amount and structure of all the fees.
2. Check the length of the contract and the conditions for terminating it.
3. Find out what territory is reserved for you and whether the brand protects it.
4. Look into the real financial performance of existing outlets.
5. Have the contract checked by both a lawyer and an accountant.

Who franchising suits

The model is appreciated above all by people who want to do business with lower risk and do not have a unique idea of their own, but do have capital and are keen to work according to proven rules. On the other hand, creative types who want to do things their own way may find franchising restrictive.

Economics and accounting

Before you sign, calculate thoroughly whether you will be left with a reasonable profit after deducting fees and costs. Fees and margins vary by sector, so check the specific current figures directly with the provider and in the contract. Properly set-up accounting will help you track whether the outlet really pays off. Do not forget to build up a financial reserve for the start-up period, when revenue may not yet cover all your costs. A realistic financial plan will show you how long it will take for the investment to pay for itself.

Franchising can be a great shortcut to a working business if you choose a reliable partner and do your sums carefully. The key is thorough preparation and a cool-headed analysis before signing the contract.

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Frequently asked questions

Is franchising safer than starting a business from scratch?

Generally yes, because you take over a proven model, brand and support, which reduces the risk of failure. That does not mean automatic profit, however – you still have to work hard and reckon with fees that reduce your margin.

What fees are paid in franchising?

Usually a one-off entry fee and ongoing fees based on revenue, possibly with a contribution to joint marketing. The amounts vary by brand and sector, so check the specific amounts directly in the contract.