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.

Pros:

  1. The company can expand very rapidly by franchising out a number of stores/services at the same time without committing large sums of money .
  2. 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.
  3.  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.

Cons:

  1. 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 .
  2. 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.
  3. 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.

Pros:

  1. It is easier to obtain loan finance from a bank when the retailer is linking up with a major Brand name.
  2. It becomes easier to start up as the Franchisor will supply drawings, advertising and other specifications.
  3. You receive marketing support and other feedback from the Franchisor.
  4. You are buying in to a known and established product or service where the demand is already there.

Cons:

  1.  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.
  2. You are restricted to selling only the items covered by the Agreement.
  3. The royalty payment can be a drag on cash flow if sales are flat.
  4. You may be restricted by the Agreement as to location and products you can provide