The Advantages and Disadvantages of Franchising

If you are considering buying a franchise or expanding your business through franchising, understanding the advantages of franchising, and the risks that come with this, is essential before you commit.

With approximately 69,900 franchised businesses operating across Australia, franchising continues to be a significant pathway into business ownership. Whether you are a prospective franchisee, an existing business owner, or a franchisor looking to grow your brand, it is important that you understand both the legal and commercial realities involved.

In this article, we will walk you through the both the pros and cons of franchising and the key financial, ongoing legal and operational aspects to ensure you can fully consider you rights and responsibilities before taking the leap.

Advantages of franchising

If you own a thriving business and are keen to capitalised on this success, franchising can offer a scalable growth model that leverages third-party capital and operational efforts, while allowing you to maintain control of the foundational aspects.

For prospective franchisees, franchising can be attractive because it allows a person to operate their own business under an established brand and business system.

Compared with starting an independent business from scratch, a franchise may offer more structure, support and brand recognition. However, the value of these benefits will depend heavily on the quality of the franchise system, the franchise agreement and the franchisor’s ongoing support.

Established brand recognition

One of the main advantages of franchising is the ability to trade under an existing brand. Rather than building a business name from the ground up. Franchisees may benefit from customer awareness, established goodwill and proven marketing.

This can help reduce some of the uncertainty that comes with starting a new business. However, brand recognition does not guarantee success. Franchisees still need to consider the location, market demand, competition, fees and their own ability to operate the business.

Access to systems, training and support

A franchise usually gives the franchisee access to the franchisor’s operating systems, procedures, branding, suppliers and training. This may include:

• initial training before opening;
• operational manuals;
• approved supplier arrangements;
• marketing guidance;
• technology systems;
• staff training resources; and
• ongoing business support.

This structure can be useful for people entering business ownership for the first time. However, the level of support varies between franchise systems, so prospective franchisees should carefully review the disclosure document, franchise agreement and any representations made by the franchisor.

Shared marketing power

Franchise systems typically operate a centralised marketing fund. Whereby all franchisees contribute to a marketing fund for the promotion of the brand by you or your chosen marketing system.

This allows:

• Shared marketing costs;
• Larger, coordinated campaigns;
• Stronger brand visibility;
• Economies of scale in advertising; and
• Control over the brand across all businesses. 

Buying into an existing business model

A franchise can provide a more structured path into business ownership. Instead of creating every system from scratch, franchisees may start with an established model that has already been tested in other locations. This can be a major advantage, but franchisees should not assume every franchise system is profitable. They should conduct proper due diligence, speak with existing and former franchisees, obtain financial advice and have the franchise documents reviewed before signing.

Disadvantages of franchising

Despite these benefits, franchising introduces complexity and risks that don’t generally arise in non-franchised businesses, and you will need to understand and carefully manage this. In particular:

Ongoing fees and financial obligations

For franchisees, the cost of operating a franchise can include upfront franchise fees, ongoing royalties, marketing contributions, training costs, renewal fees and other expenses required under the franchise agreement. These costs can affect profitability and should be carefully reviewed before signing.

For franchisors, there are also ongoing costs in managing the franchise system, including compliance, training, marketing, administration and support for franchisees.

Less control and flexibility

Franchisees usually need to comply with the franchisor’s systems, branding, suppliers, operational requirements and customer service standards. This can provide consistency, but may limit the franchisee’s ability to make independent business decisions.

For franchisors, the challenge is different. Although the franchisor sets the system standards, franchisees are independent business operators. This can make it harder to maintain consistency across the network, particularly as the franchise system grows.

Long-term contractual commitments

Franchise agreements are usually detailed commercial contracts with long-term obligations. Franchisees need to understand the franchise term, renewal rights, fees, transfer rules, termination rights and any restraints that apply after the franchise ends.

Franchisors also need to ensure their agreements are properly drafted, compliant and capable of being enforced. Poorly drafted documents can create uncertainty and increase the risk of disputes.

Risk of disputes

Franchise relationships can become contentious where expectations are unclear or the business does not perform as anticipated. Disputes may arise about fees, territory rights, marketing contributions, supply arrangements, renewal, termination or alleged breaches of the franchise agreement.

Good legal advice at the outset can help both franchisees and franchisors understand their rights, obligations and risks before entering into a franchise arrangement.

Pros & cons of franchising for the franchisor

If you are interested in franchising your business, the first step is to carefully weigh the opportunities against the potential challenges. A thorough understanding of both the benefits and drawbacks will enable you to make an informed decision with confidence.

Faster expansion compared to organic growth

Franchising allows you to scale far more quickly than opening your own locations.

With multiple franchisees able to start simultaneously, growth can accelerate without overextending your internal resources. Training can be conducted at a centralised location with the costs involved shared by all parties. Rather than needing to be done at each specific location.

Diversified financial risk

Because franchisees fund their own businesses, your exposure to individual site performance is reduced.

Revenue is typically derived from:

• Franchise fees
• Ongoing royalties
• Marketing contributions

This creates a diversified income stream across the network and allows you to review, assess and deal with each businesses’ performance on an ongoing basis as you deem appropriate.

Increased business value

A well-structured franchise system can significantly increase the value of your business.

A scalable, systemised model with recurring income is often more attractive to investors and purchasers without the same level of personal financial risk if an individual site goes ‘bad’.

Maintaining control

Because the company and the brand ultimately remain under your control, you still get to decide key aspects like, marketing strategies, uniform, codes of conduct, business policies, training requirements as well as suppliers and materials used across all franchised sites. 

Ongoing legal and administrative burden

Franchise systems require ongoing compliance and administration, including:

• Reviewing your disclosure documents annually and updating as required;
• Managing franchise agreements;
• Handling franchisees and potential disputes that can arise when dealing with individuals; and
• Ensuring your franchisee’s conduct each business in compliance with the regulations and legislation.

Dispute Risk with Franchisees

Franchise relationships can become contentious, you are dealing with individuals and ‘their’ business, so they are often much more personally invested which can be great, however, it does increase differences in opinions, particularly around:

• Fees and costs;
• Territory rights;
• Termination and renewal; and
• Broader business decisions, i.e. marketing, branding etc.

Difficulty Enforcing System Standards

While agreements provide enforcement mechanisms, ensuring compliance across multiple independent operators can be challenging, particularly as your network and geographical area grows.

This may require:

• Audits;
• Training programs;
• Legal enforcement action in serious cases; and
• Strict marketing campaigns.

Closing

Franchising can be an incredibly effective and rewarding way to grow businesses, or to open your own business within the market under an existing system, but only if done properly from the outset. The advantages and disadvantages of starting a franchise or becoming a franchisee, must be carefully considered, particularly in light of the strict regulatory framework and long-term nature of franchise relationships.

If you own a business, the key takeaway to you is this: franchising is not just a growth strategy; it is a legal and commercial system that must be deliberately designed, documented and managed according to your business and what you need and want.

Equally, understanding what it is to be a franchisee is essential, the key is understanding the true cost, legal obligations and commercial risks of the franchise opportunity.

Getting the right legal advice early can reduce risk, improve compliance and help both franchisees and franchisors make informed decisions.

Call us today

Our team at Turnbull Hill Lawyers are trusted when it comes to franchising, we have assisted businesses across Australia, including within NSW, Victoria, Queensland and Western Australia.

We work closely with you and your team to develop, structure and implement franchise systems that are legally compliant, commercially effective and tailored to your business and its needs.

If you are ready to take the next step with your business through franchising or want to become a franchisee under an existing system, contact our team today to find out more and understand how we can help.