Skip to Content

5 Risks of Franchising your Business

If your company has reached a comfortable level of stability, you may be considering viable alternatives for expanding. Franchising is a popular tactic for expansion. It is an agreement in which you, the franchisor, advertise the license to operate your company at a particular location or segment to a franchisee.

This approach has risks, but it also enables you to grow into new marketplaces, and as such, it may be worth considering.

If your small business model is conveniently replicated, franchising is the most beneficial option. Through franchising, several of the planet’s largest companies, a majority of which exist in the fast-food industry have attained enormous amounts of success.

If you find it difficult to start a business from the foundation or acquire an existing company because of financial limitations or if you find yourself concerned with the degree of risk that comes with operating a solo company, becoming a franchisee makes perfect sense.

A franchisee can operate the franchise as an independent firm as long as they follow the policies and guidelines governing how the franchising business runs (operating model, processes, and branding, for example).

It is crucial to highlight that in order to be successful through this route, you must first evaluate how your company operates so you are able to offer licensees those specifics and instructions regarding how to get their business up and running and afterward turn it into a success.

What are the Risks of Franchising your Business?

1. Regulatory Danger

Prior to offering franchises, you need to make sure that you are in compliance with the franchise legislation as a startup franchisor.

There are several benefits to franchising once you comply with state and federal franchise regulations – however, if you fail to do so, statutory as well as regulative consequences might include steep financial penalties, sanctions, and possibly the destruction of your franchise in far more severe offenses.

Prior to actually entering into a contract or charging a fee, collaborate with a team that will help you understand the statutory and fiscal obligations of starting and sustaining a franchise model.

2. Brand Dilution

Truth be told, one of the major benefits of franchising comes with one of its major threats. When you franchise, you would be allowing another businessperson to symbolize your brand. If your franchisee executes advertising and brand management in a manner that is inaccurate with your method, your clients will receive confusing messages, potentially weakening or perhaps even endangering the confidence of your brand.

As a result, it is critical that you establish detailed directions regarding the use of all of your brand elements. Before a franchisee uses any brand element, ensure that your permission is obtained.

3. Never Simple to Offer Franchises

Just because you have franchised your company does not imply that you will sell your franchises instantaneously. The task of franchising your business entails much more than preparing your FDD; it necessitates a deliberate advancement operation centered on your company and its objectives.

As a new franchisor, you ought to know that you should always strengthen and refine your franchise offering, especially within the first few years.

4. Disputes with your Franchisee

There are inevitable frictions in the franchise system. Even though franchisees are self-governing enterprises, and your franchisee can take action on day-to-day operational processes, you as the franchisor might very well maintain control over other issues pertaining to your brand.

Considering that the franchisor and the franchisee handle different parts of the enterprise, policy choices that profit them differently can become hotly contested and end up causing disagreements between the two sides. Hence it is critical to establish a Franchise Agreement that defines the franchisors’ and the franchisees’ responsibilities and liabilities.

The franchisor’s commitments under a Franchise Agreement would more or less include teaching and helping the franchisee, whereas the franchisee’s commitments would be to manage the company (e.g. the use of intellectual property rights).

5. Authority Over The Way The Business Is Managed Has Been Reduced

Because franchisees are autonomous enterprises, you cannot stipulate to them exactly how to operate the company. You aren’t granted as much influence over day-to-day activities, and you’re not in charge of recruiting, coaching, and supervising workers.

If a franchisee’s staff member delivers poor service to a customer, you might not have the power to dismiss the staff. In addition, as your franchise network grows, it might be more challenging to launch fresh items and/or services or a novel promotional tactic than it would in your own personally controlled store.