I recently drafted up a Franchise Agreement for a client who was expanding her business. She has a great product and service and wanted to develop it further to strengthen her brand. It got me thinking about the pros and cons of Franchise Agreements.
- The company can expand very rapidly by franchising out a number of stores/services at the same time without committing large sums of money .
- The Franchisor can supply ongoing marketing support and it receives a valuable income stream from franchise fees (particularly with fee % agreements) without any further input or contribution towards the cost of those sales.
- The Franchisor can insists on the same product/service layout and marketing so that standards are more easily maintained, the public know exactly what to expect and their investment is protected.
- The Franchise Agreement tends to be tilted somewhat against the Franchisee with the result that disputes over sales targets, product changes and marketing support can arise .
- As the services are being run by the Franchisee and not by the company itself, the Franchisor can often feel aggrieved at the loss of control.
- The royalty payments can be delayed or stopped by the Franchisee in a dispute and arrears of royalties can be difficult to collect.
From the Franchisee’s point of view.
- It is easier to obtain loan finance from a bank when the retailer is linking up with a major Brand name.
- It becomes easier to start up as the Franchisor will supply drawings, advertising and other specifications.
- You receive marketing support and other feedback from the Franchisor.
- You are buying in to a known and established product or service where the demand is already there.
- You have to pay an upfront Franchise fee which can be considerable where the Franchisor is an internationally brand. You may have to fund an expensive fit out.
- You are restricted to selling only the items covered by the Agreement.
- The royalty payment can be a drag on cash flow if sales are flat.
- You may be restricted by the Agreement as to location and products you can provide