Franchising Meaning, Advantages and Disadvantages

Franchising

 Meaning, Advantages and Disadvantages of Franchising 

Table of Contents:-

  1. Franchising Meaning
  2. Advantages of Franchising for Franchisors and Franchisees
  3. Advantages For franchisors
  4. Advantages for Franchisees
  5. Disadvantages of Franchising for Franchisors and Franchisees
  6. Disadvantages for Franchisors
  7. Disadvantages for Franchisees

Franchising Meaning

Franchising refers to a form of a business model that involves the practice of using another person’s business philosophy. This method allows people to operate a business under an established brand and a proven organisation system. In this method,  a franchisee purchases the right to use the franchisor’s products, trademark, techniques, services and identifying marks as well as its business model and support under specified guidelines, in exchange for a percentage of gross monthly sales and a royalty fee.  This can be an attractive opportunity for entrepreneurs who want to start a business with an established track of success.

Also, Various tangibles and intangible benefits such as training, national or international advertising, services and other support are commonly made available by the franchisor to the franchisee. In franchising the franchisee is bound to a partnership agreement with the franchisor for a specified time period. However, some exceptions do exist. These agreements between the two parties (franchisor and franchisee ) typically span from five to thirty years.

A business that is best suited for franchising should have the following characteristics:

  • A good track record of profitability. 
  • A unique or unusual concept. 
  • Broad geographic appeal. 
  • Relatively easy to operate. 
  • Relatively inexpensive to operate. 
  • Easy duplicacy.

Franchisor: It is the responsibility of the franchiser to carefully select franchisees who will represent the brand and provide the necessary operating systems and support. In return, the franchisor receives product reputation, a fixed amount of trademarks, and royalties from the franchisee. Moreover, the franchisor provides employee training,  advertising, expertise, and brand quality assurance programs to the franchisee.

Franchisee:  A franchisee is an independent organization that agrees to follow the franchisor’s requirements, such as appearance, financial reporting, operating procedures and customer service, under a franchising agreement. In exchange for these guidelines, the franchisee pays a fixed amount to the franchisor and has flexibility in the royalty based on sales.

Franchising

Advantages of Franchising for Franchisors and Franchisees

Advantages For franchisors

1. Expansion: Franchising is one of the means available to access venture investment capital without giving up control over the chain’s operations. Once the brand and formula are carefully designed and executed properly, franchisors are able to sell franchises and expand rapidly across countries and continents, utilizing the capital and resources of their franchisees.  This allows them to earn profits that are proportional to their contribution to society while greatly reducing the risk and expense that would be inherent in conventional chain operations.

2. Legal considerations:  Franchising can be a solution for obtaining Licenses and Permits, but when it comes to starting a new outlet, acquiring the necessary licenses and permits can be a tedious and time-consuming process.  Franchising can be a solution for obtaining Licenses and Permits, but when it comes to starting a new outlet, acquiring the necessary licenses and permits can be a tedious and time-consuming process. In some jurisdictions, certain permits are easily obtained by locally based, owner-operator type applicants while companies based outside the jurisdiction find it difficult, if not impossible,  to get such licences issued to them directly. Franchising comes in as a viable solution for hotel and restaurant chains that sell alcohol and wish to expand to another state or region. 

3. Operational considerations: Franchisees are known to have a stronger motivation to be successful in their business operations than direct employees. This is because they have a direct stake in the start-up of the branded business and the tangible assets that bear the brand name. As a result, the franchisor’s need to closely scrutinize the day-to-day operations of a franchisee is greatly reduced compared to a directly owned outlet.

Advantages for Franchisees

Franchising is a popular business method that offers a number of benefits for both franchisors and franchisees. Some of the advantages are explained as follows:-

1. Employment: – As in retailing, franchising provides the franchisee with the opportunity to establish a new business by taking advantage of a tried and true trademark and business model, rather than building a new venture from the ground up (which may be typical of other challenges in the face of stiff competition from franchise operators).

2. Expansion: – With the help of the franchisor’s expertise, franchisees can grow their business to new heights that would be unattainable without their franchisor’s guidance. The franchisor’s knowledge and experience provide invaluable insight into the industry, market trends and best practices which enables franchisees to make informed decisions and implement effective strategies.

3. Training: – Franchisors often provide franchisees with extensive training, which is not usually available to individuals starting their own businesses. Sometimes through traditional franchise fees, the franchisor collects and prepares for the company being started by the franchisor. When training fees and travel expenses, etc., are required in excess of the initial franchise fee, they can be deducted as part of the start-up expenses for the business.

4. Control: –  Successful franchising requires a more careful vetting process when evaluating potential franchisees. The process is more rigorous than hiring direct employees who may have experience in the concept area. This is because an incompetent manager of a directly owned outlet can easily be replaced. However, it is much more difficult to remove a disabled franchisee who owns the business’s tangible assets, regardless of local laws and agreements.

5. Limited pool of viable franchises:- In cities or regions, there is a limited number of individuals who have both the financial resources and the desire to purchase and start a franchise business. This is in contrast to the pool of individuals who can be hired and trained to manage directly-owned businesses as salaried employees. However, during economic downturns, this disadvantage is mitigated because such Individuals who are unable to secure traditional employment opportunities are willing to invest in franchises as a means of self-employment.

Disadvantages of Franchising for Franchisors and Franchisees

Disadvantages for Franchisors

1. Control: Successful franchising requires a careful vetting process when evaluating potential franchisees. that concept would require recruiting direct employees with experience in the field. An incompetent manager of a directly owned outlet can easily be replaced, whereas, regardless of local laws and agreements, removing an incompetent franchisee, who Owns the business’s tangible assets is much more difficult.

2. Limited pool of viable franchisees: One of the challenges franchisors face is the limited pool of viable franchisees in a given city or region. There may be only a few people who have both the financial resources and the desire to buy and start a franchise business. Then the pool of people who can be hired and trained to competently manage directly-owned businesses as paid employees. However, during periods of economic downturn, this disadvantage may disappear. When traditional job opportunities are scarce, many people who are unable to find employment become interested in investing their money in a franchise as a means of achieving self-employment.

Disadvantages for Franchisees

1. No guarantee:- Financial success for the franchisee is usually guaranteed in the disclosure circular and franchise agreement written by the franchisor. However, it is important to note that while the estimated start-up cost may indicate earning potential, it is no guarantee of financial success. Some businesses fail, including franchised outlets. A major issue is that new franchise buyers are not required to disclose unit financial performance figures.

2. Control:- Franchising can be a lucrative business opportunity, but it has its own challenges. One of the main drawbacks of franchising is the loss of control for franchisees. Although they gain access to a proven system, training, trademarks and marketing support, they are required to follow the franchisor’s guidelines and obtain approval for any changes they wish to make. This lack of autonomy can be a limitation for some franchisees, as they may have their own ideas and strategies for running the business. 

3. Cost:- There are several costs involved in starting and operating a franchise business. When a franchisee decides to adopt the standards set by the franchisor, they may not have the freedom to choose their own shop fittings, signage, uniforms etc. The franchisor may also restrict the franchisee from sourcing less expensive alternatives. Also, the franchisee is required to pay a franchise fee, ongoing royalties, and advertising contributions.

4. Conflict:- If either the franchisor or the franchisee is incompetent or acting in bad faith, a conflict may arise between the two parties. If either the franchisor or the franchisee is incompetent or is acting in bad faith, a conflict may arise between the two parties. An incompetent franchisor can wreak havoc on its franchisees by failing to properly promote the brand or putting too much pressure on them to generate profit.

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