Franchises provide advantages and disadvantages to franchisors and franchisees. An experienced lawyer from Harrison Law, PLLC can explain the pros and cons of franchising your business and make recommendations based on your unique situation. Consider contacting a dedicated business attorney by calling (480) 320-2310 to determine if franchising would be a financially and legally beneficial option for your business.
Pros of Franchising Your Business
Some of the most important advantages of franchising your business include:
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Increased Revenue
Having franchises can increase a business’ revenue because the franchisor receives a portion of the business’ revenue as indicated in the franchise agreement. The franchisee also benefits from increased revenue because it has the instant recognizability of the business and does not have to invest as much money in extensive and costly marketing.
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Rapid Growth
Creating multiple franchises can help a small business rapidly grow, perhaps even faster than it would be able to do on its own if it had to pay all of the costs associated with opening new locations.
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Increased Brand Awareness
The more franchises there are, the more the business is recognized. Opening multiple franchises in different locations can help expand the business to new markets. As new customers become familiar with the brand and grow to love it, the more profitable all the franchises can be.
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Minimal Employee Supervision
One of the biggest stresses of owning a small business is dealing directly with employees. The business has to handle training, field call-ins, and mediate employee disputes. As My Own Business Institute explains, employees in a franchised unit are employed by the franchisee. This means that the franchisee is responsible for employee supervision. The franchisor is only responsible for supporting training and business knowledge, not for managing, hiring, or firing franchise employees.
This minimal employee supervision allows the business owner to focus on expansion and the vision of the business rather than the day-to-day operations. Additionally, the franchisor is not generally responsible for accompanying costs associated with having employees, such as providing for benefits or paying for workers’ compensation.
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Reduced Legal and Financial Risk
Another important advantage of franchising a business is that the business can continue to grow while minimizing its risk. The franchisee assumes the debt and liability with opening a franchise. Typically, the franchise incorporates as a new business entity, thereby insulating the franchisor from legal liability.
In many situations, the franchisor can receive higher royalties from the franchisee’s sales than they would have been able to earn if they opened a separate location. Additionally, the franchisor can try out new markets and conduct research and development by requiring informational reports from franchisees.
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Self-Motivation
There are many advantages to franchisees. They can open a business often at a lower price point than they would otherwise be able to. Becoming a business owner can provide a great sense of pride of ownership in franchisees, which translates to motivation to succeed. This motivation can lead to numerous benefits to the franchisor and franchisee, including:
- Lowered costs
- Better employee hires
- Higher profit margins
- Access to more and better consumer markets
Cons of Franchising Your Business
Some of the disadvantages of franchising your business may include:
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Initial Cost of Investment
While the initial cost of investment to establish franchises is typically lower than establishing a new location, there are still costs related to franchising a business, such as:
- Start-up costs to begin operations for the business
- Research into setting up the business model
- Advertising and marketing costs
- Legal costs to create the franchise agreement, operations manual, and training manual
Franchisors must consider the financial investment to set up franchises, as well as the amount of time they will need to invest in order to make the business a success.
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Regulations
Franchises must comply with state and federal regulations. The Federal Trade Commission is responsible for regulating franchises on the federal level. Additionally, the franchise must comply with Arizona’s laws. Franchisors may have to expend more time and effort to meet all the regulations that apply to them.
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Loss of Control
One important disadvantage that business owners must consider when franchising their business is that they may lose some control. Franchisees will have to comply with the terms in the operating agreement. Franchisors sell some of the control they have over the business when they allow franchises to open.
Franchises are generally operated as independent businesses. The franchisor cannot dictate how franchisees should run the business. Franchisees may make different decisions for the business than the franchisor would have made. Additionally, franchisors do not have control over the day-to-day business operations or the hiring and monitoring of employees. In this manner, franchisees operate more like partnerships than as employees. If the franchisor is not careful about accepting franchisees, the franchisor’s brand could suffer as a result.
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Potential Conflict
Having a franchise is similar to having a business partnership, and business partners sometimes disagree about their vision for the business or how to run the business. Franchisors and franchisees sometimes have conflicting interests, with franchisors motivated to get higher revenues because their royalties are usually based on total revenue. Meanwhile, franchisees generally want higher profits because that directly affects their take-home pay.
This difference as well as the potential power imbalance between the parties can sometimes cause friction. However, the parties may be able to avoid this pitfall by having a clear franchise agreement in place that defines the rights and responsibilities of each party.
How an Experienced Business Lawyer Can Help
Franchising your business is an important decision and one that should not be taken lightly. An experienced franchise lawyer from Harrison Law, PLLC can discuss the pros and cons of franchising your business so that you can make an informed decision about the future of your business. If you decide to pursue franchise opportunities, our team can help craft franchise agreements, explain the applicable regulations, and guide you through the next steps.
Contact a Dedicated Attorney for Help Franchising Your Business
If you are considering the pros and cons of franchising your business, the legal team at Harrison Law, PLLC can help. We can discuss this information with you, as well as how we can help ensure your legal and business goals are achieved. Consider contacting our team by calling (480) 320-2310 today.
© 2022 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved
This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
