Skip to content

Make sure you grasp the pros an cons of duplicating a franshisor’s business system before siging any agreements

The Idea of becoming you own boss may have corssed you mind many times. If you have always wanted to strike out on your own, there is no better time to do it than when times are good. A good economy gives you a much better chance of succeeding in your venture.

Management guru Peter Drucker once said, “whenever you see a successful business, someone once made a courageous decision”.

Although globalisation has brought along with it layoffs, mergers, acquisitions, restructuring and outsoucing, and created a sense of uncertainty for the future, the percentage of people taking the route to becoming self-employed is still very small, mainly because there is a high sense of insecurity involved in running a business. However, there are risks to face too when you choose to remain an employee.

Besides starting a business from scratch or buying over existing business, there is another alternative to owning a business---through a franchise.

What is a franchise?

A franchise is an agreement which gives a person or group of people(also known as the franchisee) the right to market a product or service using the trademark or trade name of a franchisor, and in some cases, to use the franchisor's business system.

For example, McDonald's does not “franchise” hamburgers. It franchises its business system for selling hamburgers under its trademark. It was once a small start-up selling 15-cent hamburgers before transforming itself into a franchise system that has become a global brand today.

Why take up a franchise?

Your franchisor will assume you know nothing. He will train and assist you in the business and hely you after you have become established.

No one knows for sure if a franchised business is better than a non-franchised business or a company which starts from scratch. But based on anecdotal evidence, it appears that a new franchisee is likely to have far better prospects of success than a new non-franchised start-up.

The United States Department of Commerce has estimated that over 80 per cent of independent small businesses fail in the first five years. On the other hand, the international Franchise Association estimates that during the first five years, only 5 per cent of all franchisees fail.

There are a number of reasons for this:

  • the franchisor has invested in taking the development risk;

  • the franchisor has a working and proven model for you to investigate;

  • the franchisor trains the franchisee and helps him establish his business;

  • the franchisor provides on-going guidance and assistance including training; and

  • there are benefits in terms of bulk purchasing and in combining resources for advertising and promotion.


In summary, a franchisee obtains a range of services and benefits, which would not be available to an individual business owner, at a price which makes economic sense.

However, franchising does have its limitations:

  • initial franchise fee----This is the fee that you pay the franchisor to benefit from the business system he has established.

  • On-going royalty fees and advertising fee-This is typically a small percentage of your gross revenue payable to the franchisor on a periodic basis.

  • Conformity to standard operating procedures- You need to follow their system even though you may think that you can do better.

  • Restricted territory-You are designated a territory to operate your business which may reduce your growth ability.

  • Duration of relationship-Just like staying in a leasehold apartment, you need to return the right to operate the franchise business after an agreed period, unless you have the option to renew or sign a new franchise agreement.

  • Dependency on franchisor's success-if the franchisor's business fails, the entire franchise network could be at risk too.

If you are an aspiring franchisee, you must do some homework to educate yourself on how to investigate a franchise business, develop a business plan and negotiate an agreement.

And when your franchise business is thriving, you could always consider diversifying into other non-competing businesses to overcome any limitations in your current franchise agreement.

Leave a Comment

You must be logged in to post a comment.