The first disadvantage of a franchise is the initial investment required to purchase a franchise. This is generally higher than for creating an independent business. The initial cost covers the license for the right to use the franchisor’s brand name, business model and knowledge, as well as fees for initial training.
However, there may be other costs before you even open the store, including rent if you are purchasing a store that already exists, the price of visuals and any materials you will need in the store, marketing, service, administration, recruitment costs, etc. In short, buying a franchise requires a lot of money (at least many thousand dollars!) and those who want to start a business do not always have this money on hand.
However, it is important to consider the advantages of owning a franchise. If the profits are there and if the brand and the franchisor bring you plenty of advantages, this investment may be worth it for you! A brand name can indeed increase the value of your store.
Usually, franchisees pay recurring fees to the franchisor. These costs may consist of royalties (percentage of sales) or forced contributions to regional or national funds, particularly marketing funds. These ongoing costs influence the profitability of the franchisee’s business. This is one of the disadvantages of a franchise that is a dealbreaker for many store owners.
Unlike independent retailers, franchisees cannot keep all the profits for themselves. They pay royalties to the franchisor throughout the contract. The franchisor and franchisee share the value created and the profits. The franchisor wants his share too!
Also, keep in mind that this royalty system means that the franchisor’s success depends on the franchisees. If the franchisees don’t make a profit, the franchisor won’t either.
Being a franchisee means being your own boss, but one of the disadvantages of a franchise is that it also limits your ability to make decisions for your store.
Indeed, franchisees must operate their store while adhering to the guidelines set by the franchisor. These guidelines are helpful for store owners starting from scratch in the retail world, but they can become real roadblocks as they gain experience.
When someone buys a franchise, they agree to certain rules and limitations. These limits apply to the product line, store layout, communications, displays, systems (point of sale, inventory, accounting), etc.
Franchisees have no choice but to take into account the opinion of the franchisor and their restrictions in their decision-making process, which can be frustrating. However, the restrictions set by the franchisor exist for a reason: maintain uniformity in all branches of the company. Also, franchisees generally benefit from reduced prices if the franchisor has been able to negotiate advantageous contracts with suppliers. They have no control, but at least they can save a little on orders to suppliers thanks to the franchisor.
Also be aware that the franchisor also loses a certain amount of control when they agree to sell a franchise. In doing so, they delegate the responsibility of managing a store under their brand. Thus, there may be variations unwanted by the franchisor in the customer experience and the quality of products and services. The franchisor wants to prevent these variations from harming the reputation of the brand or tarnishing its image. A bad experience at a franchise can impact the entire business.
5. Less Room for Creativity
Moreover, this desire for uniformity on the part of the franchisor requires franchisees to adhere to a brand image. They must also offer standardized products and services. These obligations restrict the possibilities for creative and innovative endeavors by the franchise store owner. There is no room for change or for the realization of new ideas, because the franchisor’s directives must be respected.
Unlike franchisees, independent retailers have all the creative freedom in the world. Obviously, trying new products, new technologies, new tools, a new logo or new ways of doing things do not come without risk, but it is a freedom that does not exist with franchises. If you want to be as creative as you want and be free in operating your store, franchising is not a business model for you (not as a franchisee anyway).
The franchisee cannot be creative, broaden their horizons and explore new business territories. He must follow the training and instructions of the parent company to the letter. The franchisor often has written documents that define all aspects of the business. The franchisee has no excuse if he does not follow them or if he does not respect the rules established by the franchisor.
The franchisee also has little room for innovation. He cannot implement his own ideas for concepts, products, services or communications. Indeed, all franchise stores must be identical. If an owner of one of these stores implements a new idea, he or she may be responsible for implementing it at other franchise stores. An advantage of franchising is that all franchisees can benefit from the franchisor’s knowledge, brand image and concepts, old or new. However, a franchisee cannot innovate on their own without running into some problems, and that’s one of the disadvantages of a franchise.
A franchisee cannot develop their business themselves, because they must respect the wishes of the parent company. They are the ones who have the responsibility for innovating and evolving the network and preventing it from stagnating.
6. Varying Quality of Franchisors
Not all franchisors operate the same way. In the best case, the franchisor has a recognized and popular brand, gives you some creative freedom, and gives you all the training and support you need to succeed. They offer the best tools and technologies adapted to their business model and are open to innovation and changes in their systems and ways of doing things.
However, some franchisors do none of this. Some franchisors make mistakes that harm their franchisees or don’t offer franchisees anything to increase their chances of success. No support, no training, no new technologies or tools… Sometimes they offer a very strict agreement that prevents franchisees from selling their store whenever they want or that offers no freedom. Other franchisors charge endless fees and you don’t see a return on investment.
There is always the possibility that as a franchisee you do not get along with the franchisor. A business relationship with a power dynamic like this comes with a risk of conflict. No one is safe from a personality conflict, a lack of support or a decision that is not appreciated by the other party. Furthermore, if there is ever a serious dispute between the franchisor and the franchisee, the latter has limited recourse to enforce the franchise agreement or if there is a clause in the contract that they ultimately do not approve of.
It is therefore very important to research information about franchisors and not buy a franchise from just any of them. Also, don’t forget to read the franchise agreement carefully before signing it. This is one of the disadvantages of a franchise and you don’t want any unpleasant surprises, so protect yourself!
7. Possible Change of Franchisor
One of the disadvantages of a franchise is the possibility of the business changing hands. A sale of the business or a change in ownership can be a blessing if you didn’t like the previous franchisor or think the new one is better. However, such a change can be your worst nightmare if the new franchisor has a different vision of how to run a franchise network.
A new manager may have different goals or priorities than the previous one. He may also have a different idea of the strategies to use to achieve these goals. The new franchisor will therefore make decisions that affect the entire network, for better or for worse from the point of view of the franchisees.
8. Reliance on the Franchisor
The franchisee and its success depend a lot on the franchisor. The choices and financial health of the parent company have a direct impact on franchisees. The franchisee depends a lot on the managers of the parent company. They depend on them for communications, marketing, products, prices, employees, innovations and the systems and softwares.
The franchisee is also very dependent on the franchisor regarding the emergence of a new franchised store under the same brand nearby. It is the franchisor who is responsible for ensuring that a new franchisee does not appear too close to an existing franchisee.
9. Vulnerability to Franchisor Blunders
This reliance on the franchisor means that the franchisee can see big impacts of the actions of the franchisor on the traffic in its store and on its sales. If the franchisor makes a mistake, is unable to manage a crisis or to effectively promote the chain of stores, the franchisee can see their sales plummet due to the fault of their franchisor.
Indeed, if the parent company receives bad press or the public perception of the brand becomes negative, it is the franchisees who will suffer first. Franchisors are humans too who can make mistakes and lack skills in running a business.
A franchisee can suffer the consequences of questionable actions of the franchisor, but also those of other franchisees. So the disadvantages of a franchise can also be created by the peers! If one or more franchisees make mistakes or do not offer great enough services or products, the other franchisees will suffer from that. In people’s minds, all the stores in a certain network can be associated with a franchisee deemed incompetent. If the public has a negative perception of a company, they are likely to stop visiting any of the stores, even if most franchisees have done nothing wrong.
Franchisees therefore need to check what the parent company is doing. They must ensure that they benefit from all the advantages of being part of a certain franchise network. It is also necessary to prevent the franchisor from falling into dishonesty and to prevent, if possible, actions that could harm the entire network.
Note that this is a disadvantage for both franchisees and franchisors who may also see their profits decrease if a franchisee offers a customer experience that causes complaints, if he makes errors or if the quality of the products, the layout and a store’s display are not consistent with other stores. In most cases, franchisors have worked hard to build a brand image and a good reputation. They don’t want to see it destroyed because of the actions of a franchisee.
If you choose to purchase a franchise, all your financial information will be shared with the franchisor. This can be an advantage if you are looking for guidance and advice to manage the financial aspect of a business. On the other hand, if you want to keep this information for yourself or if you want more freedom in the management of your business finances, the franchise route is not the right one for you.
The franchise agreement often stipulates that several types of information (not just financial) must be accessible to the parent company. They collect information from all franchisees and centralize it. This information is useful to them for a few reasons:
- Ensure that franchisees pay enough royalties to increase them if they make a lot of profits or decrease them if they make less profits.
- Measure the performance of each franchisee and compare them.
- Make improvements in their own systems based on franchisee sales, profits and other data.
11. Restrictive Franchise Agreement
Franchise agreements are legally binding and many franchise agreements are restrictive. These limitations in the contract may be more or less numerous depending on the franchisor. This can be one of the biggest disadvantages of a franchise for many who consider this business plan.
Some contracts include painful sanctions if the franchisee does not respect a clause. The restrictions cover not only what is related to the store itself, but also what the owner does outside of operating the store. For example, some contracts include non-competition clauses that extend even after the contract ends.
Contracts are not permanent and you have no guarantee of being able to keep the license at the end of the contract term. They limit the period of time during which the franchisee has the right to operate a store with the franchisor’s branding. When this contract ends, the franchisor sometimes has no obligation to renew the franchisee’s contract.
Also, while it can sometimes be very easy to sell the franchise store or leave your role as franchise manager, certain contracts make this process excruciatingly difficult. The franchise store owner often must have permission from the franchisor to sell the store. It can also be difficult to sell due to franchise restrictions. If the franchisee wants to sell their franchise, they can only do so under the conditions provided in the contract, which restricts his freedom.
Franchise agreements are written to be beneficial to the franchisor. Therefore, seek the advice of a lawyer or legal advisor before signing such a contract. Also make sure you understand each of the clauses of the contract, the notes and the annexes before committing.
12. Possible Higher Supply Costs
Franchisees are required to purchase products, materials and services from the franchisor or their appointed suppliers. While some franchisors have negotiated more advantageous prices with specific suppliers, others have higher standards which mean that supply costs are higher. Sometimes franchisors choose more reliable but also more expensive suppliers, which increases the order amount to the supplier.
This means that if you find suppliers with exceptionally low prices or manage to negotiate such prices, you will not be able to benefit from them as a franchisee, because you have to deal with those of the parent company.
Franchisors want franchisees to have the same suppliers for two reasons. First, having the same suppliers allows all products and services across the network to be as identical as possible. Second, it prevents franchisees from going solo by finding a more advantageous supplier who could destabilize the entire network. The latter must remain united and play the retailing game collectively.
If supply costs are high, the selling prices of products to consumers will also be high. This may represent a competitive disadvantage for the franchisee or result in a loss of profits.
13. Competition with Other Franchisees of the Same Brand
Sometimes, a franchisor really has everything going for them, which means that they make the decision to sell several franchises in a certain geographic territory. In this situation, franchisees have an excellent chance of growing quickly and making a lot of profit, initially.
However, a number of them will not be able to maintain or increase these profits. It is difficult to maintain momentum in a limited territory and with other franchisees, who, even if they are under the same brand, represent direct competitors for each other.
It is the responsibility of the franchisor to ensure that the store owners to whom they sell a franchise are not too close geographically to each other, but there can be a slip. Competition between franchisees is also a problem for the franchisor and one of the disadvantages of a franchise.
Franchisors are small retailers who have managed to grow their business to the point of selling franchises. They developed a recipe for success that allowed them to make a lot of profit. However, this recipe, if it was perfect in the franchisor’s circumstances, can lead to disaster in other conditions.
It is for this reason that franchisees may need to more or less tweak this recipe for success if the conditions in which they operate are different. The franchisee’s adaptation of the franchisor’s business model to the conditions of the franchisee’s local market can lead to widely varying degrees of success. This is especially true if the franchisee has little to no retail experience.
These changes are also very complex to implement if the franchise contract is very restrictive for the franchisee. The latter can therefore fail if they find themselves unable to adapt to a market different from that in which the franchisor has operated. In such a situation, it would be up to the franchisor to help the franchisee, because the former has more experience and skills in managing a store.
15. Limited Growth Potential
The franchisee’s territory is generally defined and restricted by the franchisor. This also limits its growth potential. Franchisees will often not be able to expand beyond this territory unless they buy more branches of the franchise. The franchisor imposes these territorial limits to protect its brand and prevent franchisees from encroaching on each other’s area.
In addition, it may happen that an excess of franchisees in the same geographical area leads to a market saturation. In this situation, the profitability and growth of each franchisee is reduced and limited by the others. Also, a good growth momentum can be cut off if the franchisor makes a communication error or if the quality of the products or customer service of other franchisees leaves something to be desired.
In conclusion, the many disadvantages of a franchise can make it not the best option for retailers. However, there are not only disadvantages. The franchise model may be the ideal option for people who want to gain experience in retail and store management. Franchising is also a less risky route than starting an independent business.
Finally, remember that each person and each business is unique and what works for one does not necessarily work for another. For this reason, it is important to make decisions according to your situation specifically. Take note of the disadvantages of a franchise presented in this article, but also consider the advantages to make the best decision for you!