Franchising – An Essential Guide

Should I start my own company or a franchise?

Franchising can be an attractive concept for people looking to start their own small business with only a little business experience.  They offer a multitude of opportunities to grow and develop your own business and income, with the support that a large business provides, including an established brand.  However, in recent times, we have seen a series of well-known high profile franchises also take some well-known high-profile falls.  Names like Pie Face and Eagle Boys have become urban legends of the dangers of entering into a franchising agreement.  So what are the pros and cons of franchising?

So what exactly is a franchise? 

A franchise is a legal relationship between yourself and someone who owns a brand or trademark.  This means that you enter into a commercial agreement with an entity that has an established brand that you would like to trade under.  This agreement can take multiple forms, such as a sole proprietorship, partnership, limited liability company, or corporation.  You should seek legal advice before deciding whether or not to enter into such an agreement, and which form of agreement you should enter into.

What are the pros and cons?

Franchises can be attractive, because they are a ‘turn-key’ style of small business ownership.  There is a business model already in place, and often fit-outs, location, marketing and staff will be provided to you.  The brand has also spent its time building up recognition, so you don’t have to attract people to you as a new business.  For example, if you’re opening a Dominos’ Pizza, everyone knows what you’re about, what you sell, how to reach you, and what to expect.  There will likely be a customer base that you are given at the start of your operations, or a central sales line that diverts leads in your area to you.

However, these things all come at a cost, which some owners find prohibitive at the beginning of their operations.  Franchising costs, as well as paying for fit outs, staffing and marketing can be a big strain on a new business that is trying to build up its customer base.  This is one of the leading causes of failure in new franchises – the costs involved back to the franchiser simply aren’t matching up to the customers in your first few years.  In a self-started small business, you have the opportunity to scale up and down some of your costs, depending on how much revenue you have.  In franchising, often this is not an option, with a fixed monthly or yearly cost that may or may not be scaled to earnings.

Deciding which agreement to enter into can also make a franchise more or less risky than starting your own small business.  While starting your own business means that you are a sole proprietor, you can enter into a number of agreements with franchising.  This means that you may be more protected from liability if there are legal cases against you (if you are in a partnership, corporation or limited liability agreement).  However, the reason many people consider running their own business – being their own boss and having flexibility, may not come to fruition in a franchise.  Often franchise owners feel they have less flexibility and end up still feeling like they have a ‘boss,’ depending on the culture of the business they have franchised from.  It can also be hard for natural entrepreneurs or creative people, since as much as you may see issues in the business plan and want to make changes and tweaks to the way things are done, you won’t have as much freedom as you would owning your own start-up in processes and planning.

You also have less control over the overall business operations in a franchise.  While you’re already competing against other businesses in your area, you may also find that your franchiser is expanding too fast, and you have other stores of your same brand competing with you, and affecting your customer base and revenue flow.  These sorts of issues can be worked out at the contractual stage, but you need the assistance of an independent, experienced lawyer to make sure that you are protected from issues such as these.

While it is good that you can bank on the international or national reputation of a brand who is doing the work to build a reputation for you, this can be a double-edged sword.  If the brand comes under fire, whether or not you are directly related to the conduct of another store or the national brand, this will impact your reputation and ability to make sales.

Franchisers also make money from opening as many franchises as possible, so beware of enticing sales presentations and high-pressure sales tactics.  You will still need to be a sharp business person in order to make a franchise work, and you will need to do your research and know what your contract states and what that might mean for your business before making any agreements.

What do the figures show?

Depending on what figures you’re examining, the figures are slightly more in the favour of either small business or franchising.  While more self-started businesses seem to close down in their first year of operation, more franchisers end up defaulting on their loans. Taken at face value, it would seem that while self-started businesses may be more difficult to keep open, the ability to not invest as much at the start-up phase might protect business owners from taking out more loans than they can afford and avoid bankruptcy when businesses fail.   It is also true that sole proprietorships are much easier to close down than other types of business, and there is more freedom to leave debt-free if something isn’t working out. What these figures do show for sure, is that far from the risk-free opportunity that franchises are often presented as, many of these businesses do fail, at much the same rate as people starting their own businesses, despite some of the perks and costs.

For all these reasons, whether you are starting your own business, or entering into a franchise agreement, it is important to seek advice about contracts, agreements, business planning and your legal responsibilities and rights.

Le Brun & Associates are experts in Business and Employment law, and will take the time to understand your strategy and goals.  If you are looking for independent legal advice, click here to speak to one of our franchising agreement specialists, or for assistance with business planning.