Disadvantages of buying a Franchise

There are risks to buying a franchise. Conducting proper checks and engaging specialist franchise lawyers can minimise this risk. 

Here are a few risk factors to consider as a franchisee in respect of belonging a franchise system:

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Franchise Network

One of the main disadvantages of being part of a franchise network is the limited autonomy that comes with it.Franchisees must operate within the boundaries set by the franchisor, following strict guidelines on branding, products, pricing, suppliers, and marketing. This lack of flexibility can be frustrating for entrepreneurs who want to innovate or adapt to local market conditions.

Decisions that affect all franchisees—such as national advertising campaigns, product changes, or pricing strategies—are typically made centrally by the franchisor, which may not always align with an individual franchisee’s local needs or preferences.

Additionally, the performance or reputation of the broader franchise network can impact individual franchisees—positively or negatively—regardless of their own efforts. If other franchisees deliver poor service or if the franchisor experiences legal or financial trouble, it can damage the brand and reduce consumer trust across the entire system.

Franchisees also usually pay ongoing fees—such as royalties and marketing levies—which support the network but can erode profit margins. In this way, while the franchise network provides support and structure, it also imposes constraints and shared risks that don’t exist in independent business ownership.

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Limited  Creativity

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One of the key drawbacks of buying a franchise is the restriction it places on creativity and entrepreneurial freedom. Franchisees are required to follow a set business model, which includes strict guidelines. While this ensures consistency across the network, it limits the ability of franchisees to introduce new ideas, customise products for local tastes, or develop unique marketing strategies. For business owners who value innovation and flexibility, this lack of creative control can feel constraining.

These restrictions can also hinder responsiveness to local market conditions or emerging trends. If a franchisee identifies a new service opportunity, product idea, or promotional tactic that could benefit their location, they may be unable to implement it without approval from the franchisor—which may be slow to respond or unwilling to deviate from the standard model. As a result, franchisees may miss out on local growth opportunities or feel creatively unfulfilled, especially if they are driven by innovation and originality in business.

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Restraint of Trade

A common disadvantage of buying a franchise is the inclusion of restraint of trade clauses in the franchise agreement, which can limit a franchisee’s future business options after the franchise agreement ends. These clauses typically prevent the franchisee from operating or being involved in a similar business within a certain geographic area and timeframe during the term of the franchise and after leaving the franchise.

While such restrictions are designed to protect the franchisor’s brand and confidential know-how, they can significantly limit a former franchisee’s ability to apply their industry experience or start a competing venture, even if they built strong customer relationships in their local area.

These restraints can also complicate exit strategies and reduce long-term flexibility. For example, if a franchisee decides to sell their business or exit the system, they may be barred from re-entering the same industry for several years—effectively requiring a career change. In some cases, restraint clauses may be broader than necessary, leading to potential legal disputes. 

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Suppliers

One notable disadvantage of buying a franchise is the requirement to purchase products, equipment, or services from franchisor-approved suppliers. While this ensures consistency in quality and branding across the network, it can limit a franchisee’s ability to shop around for better prices, local alternatives, or more efficient options. This can lead to higher operating costs, especially if the approved suppliers charge premium rates or if bulk purchasing benefits are not effectively passed down to the franchisee level. In some cases, franchisees may feel they are subsidising franchisor profits, particularly if the franchisor receives rebates or commissions from these suppliers.

The lack of flexibility in choosing suppliers can also create operational challenges. If an approved supplier experiences delays, quality issues, or service disruptions, franchisees often have little or no authority to switch suppliers without first obtaining franchisor approval, which may not be granted.

This dependence can negatively impact customer service, inventory management, and profitability. Additionally, franchisees may feel constrained if they wish to adapt offerings to suit local preferences or source products that reflect community values (e.g., locally grown or sustainable goods) but are restricted by the franchise agreements.

Rebates

Another disadvantage for franchisees is the potential lack of transparency around franchisor rebates and commissions from approved suppliers. In many franchise systems, franchisors receive financial incentives—often called rebates or volume discounts—from suppliers in exchange for directing franchisees’ purchases to them. While these arrangements can benefit the franchisor and sometimes help centralise purchasing power, they may not result in cost savings for franchisees. In fact, franchisees might end up paying more for goods or services than if they were allowed to negotiate independently, effectively subsidising the franchisor’s income without seeing a direct benefit.

Any poorly explained rebate arrangements can also create a conflict of interest between the franchisor and franchisee. The franchisor may be incentivised to select suppliers based on the rebate structure rather than quality, price, or service—potentially compromising the franchisee’s operational efficiency and profitability.

While the Franchising Code of Conduct in Australia requires franchisors to disclose whether they receive rebates and how they are used, some franchisees feel that the information provided is vague or difficult to interpret. This can lead to mistrust and frustration, especially if franchisees believe supplier relationships are not aligned with their best interests.

KPIs (Minimum Performance Targets)

A further disadvantage of buying a franchise is the obligation to meet franchisor-imposed Key Performance Indicators (KPIs), which may not always align with the realities of a franchisee’s local market. These KPIs typically relate to sales targets, customer satisfaction, marketing activity, and operational compliance. While designed to maintain consistency and drive performance across the network, rigid or unrealistic KPIs can place undue pressure on franchisees—especially in regions with different customer demographics, economic conditions, or competitive landscapes. Failure to meet these KPIs may result in penalties, loss of incentives, or even risk termination of the franchise agreement.

Moreover, KPIs can sometimes limit a franchisee’s ability to manage their business according to their strengths or local knowledge. For example, a franchisee might be required to invest heavily in marketing or promotions that have limited impact in their area, just to meet head office metrics. In some cases, the franchisor uses KPIs to justify increased oversight or interventions in day-to-day operations, reducing the franchisee’s autonomy even further. This can lead to frustration, reduced morale, and strained relationships between franchisees and franchisors—especially when KPIs are perceived as arbitrary or unfair.

Fixed Terms | Periods

One of the disadvantages of buying a franchise is being locked into a fixed-term agreement, which typically ranges from 3 to 10 years. While this provides certainty for both parties, it can also limit the franchisee’s flexibility and long-term planning. If the business underperforms, market conditions change, or the franchisee wishes to exit early, they may face penalties, financial loss, or restrictions on resale. Additionally, fixed terms often mean that franchisees must invest heavily upfront (in fit-out, equipment, or fees) without any guarantee of renewal, making it difficult to recover their investment if the agreement is not extended.

At the end of the term, renewal is not always automatic and may come with new conditions, increased fees, or changes to the franchise model. This uncertainty can create stress and financial risk, especially if the franchisee has built a successful business but is denied renewal or must renegotiate under less favourable terms. In some cases, the franchisor may choose not to renew the agreement for strategic reasons, such as reclaiming the territory or rebranding. This lack of long-term security can be particularly concerning for franchisees who have committed significant time and resources to growing the business.

Once the Term expires the franchisee:

• may not be able to sell the Franchised Business;

• may not be compensated by the franchisor;

• is unable to continue trading under the franchisor's brand or use the franchisor's know-how, etc.

As such, when buying a Franchised Business it is important to ensure the initial term and any renewal terms of the franchise agreement are sufficiently long enough to obtain a return on the investment.

Territory Selection

A common disadvantage of buying a franchise is the limitation and complexity associated with territory selection. Franchise agreements often define specific geographic territories where the franchisee has the right to operate, but these territories may be too small, lack sufficient customer base, or overlap with other franchise locations. In some systems, exclusive territories are not granted at all, allowing the franchisor or other franchisees to compete within the same area, which can lead to market saturation and reduced profitability. This can be particularly problematic in densely populated regions or emerging markets where customer loyalty is still being established.

Additionally, franchisees often have little say in the initial selection or future adjustment of their territory. Franchisors may reserve the right to redraw boundaries, approve new sites, or introduce competing locations—sometimes without full consultation. This lack of control can limit growth potential, especially if the territory does not support expansion or diversification. Furthermore, disputes over encroachment or underperformance within a territory can strain relationships and create legal or operational challenges, undermining the franchisee’s ability to build a stable, thriving business.

Fees

One of the disadvantages of buying a franchise is the range of ongoing fees that can significantly impact profitability. In addition to the initial franchise fee, franchisees are typically required to pay regular royalties—often calculated as a percentage of gross revenue—regardless of whether the business is profitable. There are also commonly marketing levies, technology fees, training fees, and renewal or transfer fees. These costs can add up and reduce the franchisee’s net income, making it harder to achieve a return on investment, especially in the early years of operation.

Moreover, franchisees often have little control or transparency over how certain fees—particularly marketing or system development levies—are used. Franchisors may allocate funds in ways that benefit the broader brand but don’t directly support the individual franchisee’s local marketing needs. In some cases, fees may increase over time or be introduced with little room for negotiation, placing additional financial pressure on franchisees. This rigid fee structure can make it difficult for franchisees to adapt to local market conditions or reinvest in their own growth strategies.

Premises Lease | Occupancy Licence

When a franchise involves leasing premises or operating under an occupancy licence, franchisees take on additional legal and financial risks that can complicate the business relationship. In many cases, the franchisor holds the head lease and grants the franchisee a sublease or licence to occupy the premises. This arrangement means the franchisee does not have direct control over the lease, which can limit their ability to negotiate terms, extend the lease, or respond to changes in rent. If the franchisor decides not to renew the head lease or if the franchise agreement ends, the franchisee may be forced to vacate the premises—even if the business is otherwise successful.

Furthermore, rent and fit-out obligations can be substantial, often requiring long-term commitments and significant upfront capital. Franchisees may be responsible for costs associated with shop design, renovations, and compliance with franchisor specifications, without assurance of long-term tenure. If the location underperforms or the franchise agreement is terminated early, the franchisee may still be liable for lease-related expenses, including penalties or make-good provisions. These risks can lead to financial strain and limited flexibility, particularly when the lease is closely tied to the franchise term and heavily controlled by the franchisor.

Franchisee Default

One significant disadvantage of buying a franchise is the risk of serious consequences if the franchisee defaults on the terms of the franchise agreement. Defaults can include failing to meet performance targets, missing payments (such as royalties or marketing levies), breaching operational standards, or not complying with branding and system requirements. In many franchise agreements, even minor or unintentional breaches can give the franchisor the right to issue warnings, impose penalties, or ultimately terminate the franchise agreement. This places a heavy burden on franchisees to strictly comply with a wide range of contractual obligations, which can be challenging, especially for those new to business ownership.

In the event of a default, the franchisee may face substantial financial and legal consequences. Termination of the franchise agreement can result in the loss of the business, forfeiture of fees paid, and ongoing liability for leases, loans, or supplier contracts. In some cases, franchisees may also be subject to restraint of trade clauses, preventing them from operating in the same industry for a period of time. This can leave a former franchisee with significant debt, no income stream, and limited options for recovery. The strict enforcement of default provisions underscores the importance of fully understanding the legal and operational commitments before entering into a franchise agreement.