Learn about the advantages and disadvantages of franchising.
Some of the advantages of franchising are: 1. An Established Product or Service 2. Formal Training 3. Financial Assistance 4. Marketing and Management Benefits 5. Quality Control Standards 6. Less Operating Capital Requirement 7. Opportunities for Growth.
Some of the disadvantages of franchising are:- 1. Failed Expectations 2. Cost of a Franchise 3. Loss of Independence 4. Termination of Agreement 5. Performance of Other Franchisees.
Advantages and Disadvantages of Franchising
Advantages and Disadvantages of Franchising – Explained!
Franchising is a commonly used and easiest method of expanding a business. It helps an enterprise to progress and fulfill its capital requirements quickly.
Following are some of the advantages of franchising a business:
i. Enables the franchiser to expand his/her business quickly by receiving ongoing royalties
ii. Helps the franchiser to develop more efficient and innovative policies
iii. Provides initial support, such as training, financing, and operational, and management assistance, to franchisees
iv. Makes the business successful as the franchiser is often a renowned brand.
However, franchising business is not free from drawbacks.
Some of the disadvantages of franchising are as follows:
i. Makes it difficult for the franchiser to manage franchisees due to increasing number of franchises
ii. Involves the chances of friction between two parties due to payments, agreement, and surprise inspections by the franchiser
iii. Involves fluctuations in the cost structure of the franchise as different countries have different laws regarding the legal expenses of the entire franchising system
iv. Make the franchisee reluctant to perform efficiently as he/she is always directed by the franchiser.
Advantages of Franchising:
Franchising is a way to expand a company’s business by sharing the resources of the franchisee. Opening a large number of stores across the country calls for huge investments and incurring related running costs. The franchiser does not have to provide capital, management, or employees for each location.
By granting franchising rights, a company is able to achieve market penetration faster. To have a successful franchising operation, a company must have a proven business model and a strong brand name, otherwise there would be fewer people willing to invest in the company.
Franchisees have to operate under the instructions of the company, but since they also make money, they are motivated to work hard and make their businesses a success. Moreover, as owners of the operation, they are very interested in increasing the business.
The franchiser immediately gets an initial franchise fee and a continuing royalty of 8 per cent to 10 per cent of the gross income of the franchisee.
The flip side is that franchisees may sometimes be expensive for the local partner, since the franchisee pays a security, royalty, and a percentage of sales each year, addition to investing in real estate. Hence, startup costs relating to the franchise may be high. The franchisee lacks flexibility and freedom and must operate within the framework provided by the franchiser.
Many franchise operations have failed in India because of the high costs of operation. Another drawback of the franchise model is that the franchiser has the right to open more stores in an area, affecting business of existing stores.
There are other disadvantages as well. One major disadvantage is that companies impose difficult conditions on the franchisee. For instance, an education and training company imposes the condition that a franchisee pays additional annual payments for use of the trade name, apart from the continuing royalty.
Franchisees also pay for promotional and other local expenses, so little is left for them. In times of a business downturn, when local operations are making losses, franchisees may resent even the paying of royalty.
Another major disadvantage is that some franchisees, after learning more about the trade, may look to terminate the agreement and start a similar business on their own. On the other hand, once the franchisee has developed the market, the company too can open another franchisee in the same area. The older franchisee will resent such action.
Advantages and Disadvantages of Franchising to Franchiser
There are many wonderful success stories in franchising- VLCC, Cookieman, JumpoKing, NITT, Aptech, Dosa Plaza, etc. These organizations illustrate examples of large successful franchise businesses. Franchising continues to grow and expand into professional operations. Doctors, dentists, accountants, and opticians have also developed franchise systems. A carefully designed and operated franchise system will generally minimize the business risk for both the franchisee and the franchiser.
The franchiser has a number of advantages which he receive from starting a franchising business and those are as follows:
1. An Established Product or Service:
Probably, the major advantage to the franchisee is the acquisition or use of an established product or service. The franchisee obtains a business that has an established product or service name. Often, the customers are already aware of the name and reputation which the product or service provides.
This advantage is of utmost importance to the franchisee because of the considerable amount of money which the franchisor spends to keep the public aware of his fast food, service, soft drinks, or automotive repair services.
Many franchisers spend large portions of their advertising budget on national campaigns through television commercials and full-page advertisements in newspapers and magazines. Even small franchisers often use local print or electronic media and point-of-purchase displays to attract customers in the local area. Often, a franchiser will share the advertising cost with a local franchisee.
2. Formal Training:
Most franchisee training begins with an initial period of days or weeks at a central training facility generally close to the headquarters’ office. Dosa Plaza provides training for all his franchisees at his Vashi training center which is located at Navi Mumbai. The initial training for franchisees covers all the operating procedures used in the business plus marketing, advertising, promotion, record keeping, inventory control, management, insurance, and human relations.
This generally includes all the business operations and functions which are necessary to operate the business and/or managerial and accounting functions. Because of the extensive formal training offered by franchisers, many do not require prior experience in the industry or business. Some franchisers prefer that their prospective franchisees have zero prior business experience in their specific field of operation.
3. Financial Assistance:
Generally, at the start-up phase of a business operation, the prospective entrepreneur’s sources of capital are very limited. The entrepreneur’s ability to borrow funds during this time is generally at the lowest level. Forming a relationship with a franchising operation allows the aspiring franchisee to increase the ability to obtain financial assistance.
While most franchisors do not provide direct financial assistance to their franchisees, some do. Some franchisors will allow the franchisees to purchase fixtures and furnishings over an extended period of time. Additionally, these franchisors may provide the land and/or building on a lease basis to the franchisee. The franchisee generally will be responsible for the payment of all fees associated with starting a franchise business.
4. Marketing and Management Benefits:
Many customers turn into a Dosa Plaza, because of prior experience and the reputation of these franchised organizations. Individuals across the country continue to use McDonald’s, Burger King, Kentucky Fried Chicken and Wendy’s because of their expectation of reliable food products. Consumers have a tendency to utilize franchising organizations because of their name, decor, logo, or perceived quality of their standardized product or service.
Franchising provides a proven successful business product and/or service identification. Probably, one of the greatest advantages of choosing a franchising method of doing business is the opportunity to have access to the marketing and promotional image of the franchise business. Most franchisors promote, advertise, and market their name, logo, product and service with the greatest of abilities and focus their efforts on name recognition.
Through the repeated use of advertisements, billboards, and jingles, top-of-the-mind awareness is quite high for many franchised businesses. The franchisee acquires the right to use the franchisor’s nationally advertised trademark or brand name. This allows for instant market recognition both locally, as well as with traveling customers.
The franchisor has also developed a standard operating manual and procedures that allow the new franchisees to learn how to operate successfully. The new franchisee learns a successful system and how to replicate that system in a local market. Such programs, however, do not ensure success.
The franchisee may lack ambition, desire, or perseverance. Generally, the system is strong enough to allow any prospective franchisee the opportunity to succeed if they will provide the “sweat equity” necessary to be a success.
5. Quality Control Standards:
Each franchisor imposes certain quality control standards on the franchisee. These standards allow the franchise system to achieve consistency and positive service or product uniformity throughout the entire system.
By developing and maintaining high standards, the franchisor does the franchisee a tremendous business service. Franchisees appreciate high standards and learn that these standards of operations and performance are necessary and generally the major reasons for success.
The quality standards present a consistent patronage image, help ensure return business, develop employee morale and pride in work, and allow the employees to feel the value of teamwork. These standards, while apparently dictatorial, serve to help both the franchisor and franchisee.
Because the franchisees learn to courteously and efficiently serve an appealing meal in an attractive and comfortable atmosphere, they have a better chance to attract and maintain a large clientele which provides increased benefits and profits to them and larger royalties to the franchisor.
6. Less Operating Capital Requirement:
Another major advantage for franchisees is that generally their start-up costs require less initial operating capital because of lower initial costs in starting the business. Most franchisees do not have to pay for architectural designs because these are often provided at a nominal fee by the franchisor. The franchisees also generally pay lower inventory fees because they already know generally what will and will not sell.
New franchisees may also be able to receive trade credit from different suppliers because of their association with the franchising system rather than being an independent person. Franchisees also receive the benefit of knowledge relative to store layout, design, and floor space utilization which allows them to save countless hours and dollars in developing the new business.
7. Opportunities for Growth:
Many franchisors provide new franchisees the opportunity to grow, not just with the initial franchise unit, but also by later on purchasing additional franchise locations. A territorial franchise guarantees no competition from other franchisees or corporate stores within the specific geographic boundary.
The area development agreement allows the franchisee the possibility of developing new stores within the specified territory during the specific period of time. The franchisee has the opportunity to develop the first store and to allow it to grow and expand throughout its system.
These advantages show that the franchise system is based upon a mutual understanding and trust relationship between the franchisor and the new franchisee. The franchisor has realized that the growth and profitability of the headquarters organization is dependent upon the success of the franchisees. It is to the advantage of the franchisor to provide as many positive and supportive services to the franchisees as they are capable of doing.
The franchise system is designed to work well for both the franchisor and the franchisee. The franchising agreement is a contractual relationship between the franchisor and the franchisee to help build mutually beneficial business operations.
This franchise approach helps to develop profits and a healthy and prosperous business life for both the franchisee and franchisor. However, there are some disadvantages to the franchisee which you need to be aware of before beginning your franchising operation.
Those disadvantages are:
1. Failed Expectations:
Franchising is like a coin—it has two sides. The franchisor’s business experience, expertise, trademark, selling methods, and advertising are part of what the franchisee desires to acquire. Often a franchisee sees this business opportunity as a sure bet. This is not true. While the franchise system provides a tremendous opportunity to utilize a successful system in a new location, it does not always succeed.
If the location is terrible and/or there are insufficient customers available within the given target market area, then generally the franchise operation will not succeed. Franchising generally succeeds when the new franchisee correctly adopts the marketing, management principles and practices that the franchisor is offering.
2. Cost of a Franchise:
It is not cheap to start a franchise business. The cost of a franchise generally begins with the franchise fee and then follow the rest of the start-up costs including land, building, fixtures and furnishings, inventory, signage, and training programs. The final total investment grows rapidly and becomes surprisingly large.
The start-up costs for Apollo Hospitals is now estimated at Rs. 10 to 20 crores depending upon location and buildings. This is in addition to the initial franchise fee, royalty fee and advertising fee. On the other hand, you can start a successful new ventures avoiding such huge costs.
3. Loss of Independence:
An apparent frequent disadvantage is that entrepreneurs leave behind the opportunity of having absolute independence. A franchisee surrenders a considerable amount of independence when the franchise agreement is signed. Certain franchisees may wish to change the products or services being offered — this is often forbidden by the franchise agreement.
Franchisees need to realize that they will be following a business operation prescribed to them by the franchise organization. This does not destroy the need for creativity, drive, and high standards on the part of the franchisee. It is only through personal efforts that the franchising system ultimately works.
4. Termination of Agreement:
The franchise agreement is originally signed for a specific period of time. Generally, the franchise agreement includes the clause for renewal and without “just cause” by the franchisor, the franchise agreement is automatically renewed for a period of time.
Almost all franchise agreements contain provisions concerning the franchisees’ transfer of ownership rights to others, termination of the agreement, renewal of the agreement and a covenant not to compete. Any of these provisions may be used by the franchisor if the franchisee fails to follow all of the provisions the franchising agreement.
5. Performance of Other Franchisees:
A disadvantage often overlooked by new franchisees is the performance by other franchisees. If other franchisees begin to lower their standards and diminish the quality of products or services, this reflects upon the total franchising system. This brings hardships to the franchising program and diminishes the value of the franchising organization throughout the system.
The franchiser cannot afford becoming lax in managing the franchise system and must maintain quality standards throughout the network. Poor performance ends up reflecting throughout the system and not just in one specific local.
In summary, you, the franchisee, need to realize the advantages and disadvantages of a franchising system. Most of the advantages are concerned with the advice and assistance available from the franchiser while the disadvantages concern the over dependence which you might develop upon the franchise system. You need to weigh the advantages and disadvantages carefully while at the same time analyze the opportunity for profitability and your willingness to enter this specific business organization. The final decision is yours.
7 Advantages and Disadvantages of Franchising – As Discussed!
Advantages to the Franchiser:
i. Enter new markets and expand reach and scale of operations.
ii. Less capital more business.
iii. Steady income in the form of royalties.
iv. When business improves, he can get benefited by the large scale operations and get lot of discounts through bulk purchases.
v. Can serve customers more profitably and efficiently through exciting offers, continuous cost reductions and lot of advertising.
vi. Full administrative, managerial support from franchiser helps the franchisee to establish business quickly and successfully.
vii. Instead of starting a business from scratch, the franchisee can run the show with confidence, because the model has worked elsewhere and almost everywhere. The risk element, therefore, is considerably reduced.
Disadvantages to the Franchiser:
i. Franchisees may spoil the show if they fail to keep the brand image of value intact.
ii. Advertising, packaging, administrative and managerial support may be too demanding and even taxing if too many franchisees are out to milk the cow.
iii. Remote button control and operations may not always pay off because franchisees know how to beat franchisers in their own game. They may set up shop in disguised names in the same locality or in a different location.
iv. Franchisees may refuse to pay royalty fee in time citing various reasons.
v. Freedom to carry out business independently is missing.
vi. Franchisees may be forced to buy everything from the franchisers even when cheaper alternatives are available nearby.
vii. At the end of the day, franchisee does not own anything at all, despite being in the business for a long time.
Advantages from the Franchiser’s Point of View:
1. Allocation of capital – It is required to build the franchise infrastructure and pilot operation. At the beginning of the franchise program, the franchiser is required to have the appropriate resources to recruit, train, and support franchisees.
2. Financial – It creates another source of income for the franchiser, through payment of franchise fees, royalty and levies in addition to the possibility of sourcing private label products to franchisees.
3. Strategic – Franchising is the spreading of risks by multiplying the number of locations through other people’s investment. It means availability of faster network expansion and a better opportunity to focus on changing market needs
4. Operational – Franchising also means uniformity of procedures, which reflects on consistency, enhanced productivity levels and better quality. It creates and maintains an effective quality control.
Disadvantages from the Franchiser’s Point of View:
1. In the beginning of the franchise programme, there is a fear of risk that trade name may be spoiled by the franchisee until the franchiser is capable of selecting the right candidate for the business.
2. The franchiser has to disclose the confidential information in connection with the franchising before giving power for use.
Advantages from the Franchisee Point of View:
1. Business plan – In almost all the franchisee business, the franchisers provide help to the franchisee to develop the business plan.
2. Lower risks – Franchise operation has a lower risk of failure than an independent business.
3. Marketing assistance – Franchiser usually provides marketing assistance to popularize the parent company through professional advertising campaigns.
4. Established product or service – A franchiser offers a product or service which are already available in the market and that has sold successfully.
Disadvantages from the Franchisee Point of View:
1. The payment made by the franchisee as fees and royalty to the franchiser in some cases can be exaggerated.
2. The transfer of all goodwill built in the local market to the franchiser upon expiration or termination of the franchise contract.
3. The franchisees provide the capital for expansion, which allows you a high degree of financial leverage.
4. Because the franchisees contribute to an advertising fund, which you control, you can expand brand awareness without financial commitment on your part.
5. The franchisees provide the capital for expansion, which allows you a high degree of financial leverage.