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Page 3 of 7
Buying a Franchise
2. The Disadvantages
2.1 The cost may be more than meets the eye.
- You pay a fee to buy into the franchise (often £5,000 to £10,000, but it can be as much as £250,000). You also have the usual business costs (premises and equipment, stock and other supplies). Some of these will be bought from the franchisor.
- You pay a continuing royalty on sales, or a management fee, regardless of whether you are making a profit or not. This can be a fixed amount or a percentage of sales or a mixture of both.
- Some extra costs may be charged separately. For example, a contribution towards the franchisor's advertising costs or fees for the training you receive.
2.2 You have to agree to operate within certain limits.
The contract between you and the franchisor will usually regulate what you are allowed to do.
- You cannot change the business. For example, you cannot introduce new products to suit your local market.
- You can only sell your franchise to a buyer approved by the franchisor.
2.3 Your relationship with the franchisor means you are exposed to certain risks which are outside your control.
- The risk of the franchisor failing to fulfil its obligations (eg providing support in the form of brand advertising or training).
- The risk of the franchisor going out of business.
- The risk of the franchisor being sold to a new owner who changes the operation or is simply more difficult to deal with (see 3.2).
- The risk of actions by the franchisor or other franchisees giving the brand a bad reputation.
Labels: Buying/Selling a Business
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