Q&A - What are the disadvantages to a start-up of setting up as a franchise?
Whilst starting a business as a franchise is traditionally seen as a lower-risk approach, there are some significant disadvantages to consider:
- Franchises are not cheap! The franchisee has to pay substantial initial fees and ongoing royalties and commission. He/she may also have to buy goods directly from the franchisor at a mark-up
- There are restrictions on marketing activities (e.g. not being allowed to undercut nearby franchises) and on selling the business
- There is always a risk that the franchisor will go out of business
- The franchise needs to earn enough profit to satisfy both the franchisee and franchisor - there may not be enough to go round!
There are many good franchise opportunities available for a start-up, but some poor ones too. So there is still a need for the entrepreneur to do market research into the franchise
A franchise is a kind of “halfway house” for a budding entrepreneur. It is a lower risk method of market entry and it is often easier to raise finance. However, running a franchise does not offer the same kind of long-term financial rewards that owning a business outright can.
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