Understanding Franchising Risks

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January 31, 2013BusinessNo comments

Franchising may seem to be a lucrative business opportunity due to the fact that it already has a business model. Having a ready business model will help you run a business successfully. At the same time, you can always ask for assistance in terms of site selection, market plans and financing. Every franchise has product and management training which will prepare you for the business before you start. Additionally, you will receive a lot of advertising assistance.

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One the other hand, there are some risks and disadvantages associated with franchising. To start with, you will not have full control on how the business will be run. You may also have to pay for things that may not be essential for you like advertising. You will also have to keep things in your inventory that may not be suitable for your particular location. Franchising is a strictly controlled business model meaning you may not be able to try an idea no matter how good it is.

Risks involved with franchising

If you are really interested in franchising, you can choose two of the main forms available: business format franchising and product name franchising. The former is more restrictive on how you will be able to run the business, but it has an advantage of the franchiser helping you more. The best way to make a choice would be by talking to a franchise consultant.

Buying a franchise is not cheap as there is the initial fee that can range from a thousands dollars to tens of thousands of dollars. In some cases, this amount of money is non-refundable. Renting or buying in a proper location combined with furnishing the franchise according to their standards may tend to be more costly than if you run your independent business.

In franchising, the cost of your inventory is likely to be higher than if you had your own business. In some cases, you may be subject to a grand opening fee you that is paid for securing a business promotion. Additionally, you have to pay some royalties that will be based on gross income of your location. This may be very inconvenient as you need to pay this amount even when you have made small profit. The amount is paid as it is a fee that is levied to give you the franchiser’s name usage rights.

National advertising fees will have to be covered by your business. In a good number of cases, some of these are in the form of co-op arrangements. This will mean your business is advertised in rotation with other locations or advertised only in your area. You may be disappointed to find that the advertising fee is not used to advertise your business. It is mainly used to attract new franchises or advertise the brand.

Franchise terms usually run between a ten to twenty years. Once this term is over, there is a risk that you may not be able to renew the agreement. If you cannot meet the standards of operation or you fail to pay the required fees, the franchisor can cancel the agreement. All these are risks that you should consider before you think of purchasing a franchise.