As a franchisee, your business can take advantage of product brands and services that have become well-known to the public through vigorous development and marketing strategies made by the franchiser. A franchiser will request that you sign a contract spelling out specific requirements you must follow. Each condition you agree to will have some drawbacks you need to be aware of before deciding to become a franchisee.
Before your business can become a franchise, you will be required to pay the franchiser a licensing fee up front. This payment will grant you the rights to use the trademark and other things that come along with the particular brand. Licensing fees can be very expensive, depending on the company you choose to work with, and in many instances, do not include real estate; you’ll have to acquire that independently. Many franchise agreements are for a 10-year period, which gives you plenty of time to build your franchise into a success. However, most franchiser contracts have a non-competition clause, which will prohibit you from opening a similar business in the area, in some cases for a few years, should you decide to break your franchise agreement early.
You will have to pay a royalty, known as a franchise fee, each month for ongoing use of your franchiser’s goods and services. In most cases, part of your royalty payment is used by the franchiser to advertise the brand. Most well-established companies spend large amounts of money on advertising, which can be very beneficial in making your franchise location's revenues increase. Franchise fees are usually taken based on a percentage of your sales, not profits, which can make things difficult if your business is struggling to make ends meet.
As a franchisee, you will be obligated to follow strict standards and procedures under your franchise agreement. All areas of your business, like the products you offer, pricing, policies, marketing and even your employee performance, can be regulated by the franchiser. By enforcing exacting policies, the franchiser can make it difficult for you to refine any area that might create a competitive edge in your market.
By entering into a franchise agreement, you will be compelled to market your business within a set geographical area. Limits on territory can make increasing the bottom line difficult, especially if your business relies on outside sales. Your ability to open a new location will normally be restricted by your franchiser in order to protect other members who own businesses in nearby regions or territories. Because of this, it may be difficult for you to grow your business unless you develop locations that are spread over a wide area.
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