Like any kind of business venture, franchising comes with a list of both pros and cons. The advantages of the franchise model are discussed at length, but if you want to build an accurate picture of whether it’s truly the right option for you, you’ll need a good understanding of the potential risks and challenges you’ll face.
Risk is inevitable – it’s how you plan for it and minimise it that’ll set you apart.
The Potential Cons of Franchising
Franchising is generally seen as being less risky than running a brand-new start-up business. However, there are several things that may make prospective franchisees wary about committing to a franchise and risking their investment.
- High initial investment
- Ongoing royalties
- Oversaturated markets
- Less flexibility & limited control
- Dependence on the franchise
- Legal & contractual obligations
- Franchisor expectations
- Exit complications
High Initial Investment
The financial commitment and initial investment in a franchise business can be considerable, especially for popular, well-known brands. The initial franchise fee is a set fee that all new franchisees must pay before getting the right to operate under the franchisor's name and gaining access to all their resources.
However, financing is often a possibility, and legitimate, trustworthy franchisors will provide upfront costing when you begin the franchising process, so you know exactly what to expect from the start.
Ongoing Royalty Payments & Other Fees
Alongside the franchise fee, which is essentially the start-up costs, the franchisee will also have to pay ongoing royalties for the continued use of the franchisor’s brand and support. Some franchisors may also charge a marketing fee as a separate cost.
Royalty fees are an important part of how the franchise structure works, which many people understand going in. For many entrepreneurs, the ongoing royalty fees (usually taken as a percentage of gross sales) are a fair trade for what the franchisor themselves provides.
Oversaturated Markets
If customers know they can visit a store just like yours in other locations, what’s to entice them to your store specifically? Franchises operating too close to the same franchise business or competing businesses offering too-similar products may have more trouble attracting consistent customers.
Reputable franchisors will often provide territory protections in your franchise agreement, meaning that other franchisees of the same brand are not operating too close to each other and saturating the local market.
Less Flexibility & Limited Control
Signing a franchise agreement means acknowledging the responsibility to follow the franchisor's guidelines. Franchisees must uphold the standards of the brand to maintain quality and consistency. Entrepreneurs who are interested in developing or customising products or new services may find this a particular drawback.
Some franchisors may allow a degree of creative freedom, and most will provide a good deal of freedom and control over daily operations, so franchisees will still have the experience of being their own boss at the helm of a business. Depending on the franchisor, you may also have influence over strategies for succeeding in the local market.
Dependence on the Overall Performance of the Franchise
How well (or poorly) the franchise brand is performing overall trickles down to the franchisees. When things are good, they’re good across the board; however, this dependence can be a risk factor when things outside of the franchisees' control start to go wrong. A franchise failing from the top down will affect individual locations, even if they are continuing to perform relatively well.
The reliance on the ongoing support of a franchisor can also pose a risk, especially if the support provided is insufficient and not tailored to the real-world challenges franchisees face. Investing in a franchise with a long-standing history and good reputation is key when avoiding potential issues like this.
Legal & Contractual Obligations
Some franchise agreements can favour the franchisor quite heavily, leaving franchisees with limited options. If franchisees (or indeed franchisors) do not adhere to the legally binding terms, they can face legal consequences.
Make sure you’re investing in a partnership you think is fair and provides proportionate opportunities for both parties. Seeking legal advice before you move forward with any agreements is essential for mitigating the risk of signing an unfair agreement or one that may cause disputes in the future.
Inability to Meet Franchisor’s Expectations
As part of the aforementioned franchise agreement, franchisees will have to meet various expectations set by the franchisor. For some, there may be a risk that the franchisor sets unrealistic performance expectations that cannot be met and goals that cannot be feasibly achieved.
Again, carefully reviewing the franchise agreement and having an expert look it over can go a long way to ensuring you aren’t going to be set up for unachievable revenue goals or fee payments.
Exit Complications
If a franchisee does not perform as expected, the franchisor may have the right to terminate their agreement, which is something that will likely not be reversed. Equally, it can be difficult for franchisees to end their agreement on their own terms (i.e. because it is not as they expected or is too challenging), due to certain exit terms in the franchise agreement.
Additionally, there can be limited resale options for those looking to sell their franchise and move on, as franchisors will need to approve of the buyer. Some franchisors will help in the resale process if applicable.
Is Investing in a Franchise Worth the Risk?
Despite these potential downsides, more and more entrepreneurs are investing in franchises. Why? Because, for many, the rewards outweigh the risks.
The advantages of franchising include access to market experience, ongoing support, brand recognition, increased buying power and industry connections, the opportunity to be your own boss and a higher return on investment sooner.
Crucially, franchises also have a reduced risk of failure when compared to start-ups. This can offer a valuable sense of security, especially for people looking to succeed in a new-to-them industry.
Investing in a Trustworthy Franchise
Investing in the right franchise partner can do a lot to mitigate the potential risks associated with franchising. Choosing the best franchisor for your chosen market comes down to smart research and planning – you can find out more about this in our guide on how to research a franchise.
An established franchisor with a good reputation, transparency and proven experience will pose far less of a risk than fad franchises that seem too good to be true. If a franchisor is making enticing yet unrealistic-sounding guarantees, it’s time to look elsewhere.
Here at Esquires Coffee, we work closely with each prospective franchisee to ensure they are set up for long-term success with mitigated risk. If you are interested in buying a coffee shop franchise and would like to find out more, please see our FAQs or get in touch.
