If you’re thinking of starting your own business, buying a franchise can be a great idea. It allows you to set up your own business using a formula that has already proved successful, as well as benefitting from the experience and support of the franchisor.
Well-known franchise businesses in the UK include McDonalds, KFC, Starbucks, Utility Warehouse, and Toni & Guy.
However, franchising doesn’t suit everyone, and as with everything there are both advantages and disadvantages to this type of business. Here we take a look at the main advantages and disadvantages of buying a franchise.
Advantages of buying a franchise
The main advantages of buying into a franchised business include:
- A franchise is usually based on a proven business idea – you are signing up to a product or service that you already know works.
- You may be able to use a recognised brand name which often makes it easier to sell to customers.
- You have the benefit from any national promotion carried out by the franchisor.
- A good franchise operation will give you full support including training, setting up the business, finding suitable premises, and ongoing support and advice.
- You are usually given exclusive rights to the franchise in a specified region.
- Financing the business is often more straightforward.
Disadvantages of buying a franchise
The main disadvantages of buying into a franchise business include:
- The cost may be more than first expected. In addition to the franchise fee, you may also have costs associated with premises, equipment, stock and other supplies.
- You pay a continuing royalty on sales, or a management fee which can be a fixed amount or a percentage of the value of sales. This payment is made whether you are making a profit or not.
- You have to agree to operate within certain limits.
- You cannot change the business, e.g. introducing new products to suit your local market.
- You can only sell your franchise to a buyer approved by the franchisor.
- You are exposed to risks which are outside your control such as the franchisor failing to fulfil its obligations, or the franchisor going out of business or being sold to a new owner.
Evaluating a franchise
Before you make a decision, it is important to evaluate the franchise that you are thinking of buying into.
Do as much research as possible and ask questions – the franchisor should provide an information pack that answers all the basic questions. Gather information from a variety of sources and find out as much about the industry and the market as you would if you were starting your own business from scratch.
Read the trade press such as Franchise World and Business Franchise, and attend franchise exhibitions where you can talk to various franchisors in person.
Do not take everything at face value. Look for evidence that what the franchisor says is true, and guarantees that it will stay that way.
Remember never to enter into an agreement without legal advice!
If you would like any advice on the accounting and bookkeeping side of starting a business, please get in touch with us here at Magpie Accountancy.