Articles & Resources
The Advantages and Disadvantages Of Owning A Franchise
A franchise is a contract or agreement where a franchisor gives a franchisee the right to start a business under a business name that already exists in exchange for fixed payments.
Think of it like a lease. You're 'renting' the franchisor's business system and brand for a time, and when that time is up, it's over. Those rights revert back to the franchisor, who can sell those rights to someone else
What Are The Advantages Of Owning A Franchise
- you are able to operate your own business
- you enjoy the benefit of using the franchisor’s known reputation and brand
- you do not need to be an expert at running your own business because you will receive ongoing support and training from the franchisor.
- less business risk for you if the franchise has developed a successful product.
- it is generally easier to borrow money to buy a franchise than to start an independent business because of a proven track record
- Franchises have a higher rate of success than start-up businesses
- lower unit costs that come from the purchasing power of a large buying group
What Are The Disadvantages Of Owning A Franchise
- the franchisor will have a substantial amount of control over how you operate. For example. the franchisor will set the opening and closing times, what is sold and at what prices
- you have to pay a certain fees to the franchisor for the right to use its brand and product.
- there is an initial startup fee that can range from as little as $10,000 to $100,000 or more.
- Then there is an annual franchise fee, marketing fee, and other annual fees which are percentages of your revenue (not your profit!) between 5 per cent and 8 per cent of gross sales, so these can be substantial.
- If you renew the contract, there’s also a renewal fee
- People will recognize your business name and you will not have to spend too much on marketing as the franchisor will take care of this.
- Franchisors do not have to renew an agreement at the end of the franchise term
Who Pays For The Location?
The franchisee either constructs and develops the premises itself (at its cost) or can buy the constructed premises on a 'turnkey' basis from the franchisor
Why Do You Need A Lawyer?
A lawyer's job is to know what's 'normal' and what's not; what's negotiable and what's not. A good franchise lawyer would not send the franchisor a 30-page list of changes to the contract, as this will frustrate the franchisor and make the process painful. When we at Nava Wilson review the franchise contract, we know what to look at and what to negotiate. For example, are you getting an exclusive territory to operate or can the franchisor let someone operate near you?
What Steps Should You Take Before Deciding On A Franchise?
We recommend that you talk to other franchisees before making a decision to buy a franchise. Their input is invaluable. Ask them: Are you happy? Are you making any money? What did you negotiate?
What Goes In A Franchise Agreement?
Typically, franchise agreements will describe, (in legal language, of course):
- the parties to the agreement (the name, address and other details of the franchisor and the franchisee, and any other parties to the agreement);
- the business structure being licensed to the franchisee, including, for example, the business' name, trade-marks, appearance, trade secrets, patents, copyright, designs, procedures, techniques, business and operating manuals, accounting systems, employee uniforms, etc., and/or services which are the subject of the franchise;
- the duration of the franchise (that is, the length of time during which the franchise will continue, and any renewals or options to renew the franchise at the end of the term);
- the fee or fees payable by the franchisee to the franchisor, some of which may be one-time fees (for example, a payment of an initial franchise fee), and some of which may be ongoing fees (for example, a monthly payment of a percentage of the gross monthly sales of the franchise);
- any territorial limitations on the franchise;
- any training and/or re-training requirements;
- the obligations on the franchisee
- to abide by the franchisor's business structure and standards (and the consequences of failing to do so);
- to modify the business structure and standards at the request of the franchisor;
- to introduce the franchisor's new products and services into the franchise, and any obligations to cease selling particular products and services in the franchise;
- to purchase products or services from the franchisor or from approved suppliers, and fixed prices;
- to operate during to the required hours and days of the franchise;
- to advertise and promote the franchise, or to contribute to the franchisor's advertising or promotional program (by contributing a percentage of gross sales);
- to participate in special promotions;
- regarding the maintenance of financial records and to make these records available to the franchisor;
- relating to insurance policies;
- relating to if the franchisee can sell its business and to whom;
- relating to how a franchise may be terminated by the franchisor;
- to lease a certain location with a certain design.
Please note the content on this web site is provided for general information purposes only and does not constitute legal or other professional advice of any kind.