Advantages & Disadvantages Of Franchising

As with any business model, franchising has both its pros and cons. Perhaps one of the most effective ways to determine whether franchising is a good fit, whether as a prospective franchisor or franchisee, is to evaluate themselves and determine whether the potential benefits outweigh the potential problems.

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For The Franchisor

Advantages

  • Improved cash flow from additional source of income through initial and ongoing franchise payments.
  • Lower capital outlay and risk for growth of additional business units as development costs will be funded by franchisees.
  • Improved economies of scale from higher purchasing power.
  • Lower advertising and marketing costs as expenses are shared among a larger group.
  • Generation of motivated managers (franchisees) who will self-incentivize towards business success.
  • Able to experience faster network expansion.
  • Able to maintain a smaller central organization when compared to developing and owning corporate units.

Disadvantages

  • Considerable capital and resource allocation is necessary to develop and integrate a pilot operation to support the franchise system.
  • Less control over managers (franchisees) as compared to dealing with the franchisor's own employees.
  • Franchisees may not necessarily have the same goals and objectives as the franchisor.
  • Risk of accepting errant franchisees whose actions may negatively impact all units under the same brand name.
  • Required to disclose confidential information to franchisees which may become a risk to the business.
  • Franchisees may place pressure on the franchisor to have their suggested policies or procedures implemented.

For The Franchisee

Advantages

  • Able to operate a proven business concept.
  • Access to proven operating systems and procedures.
  • Avoiding the "trial and error" period in starting a new business as the franchisor will impart the necessary knowledge and skills.
  • Assistance with initial business unit setup and training, and ongoing operational and management support.
  • Association with well established brand and its products and/or services with ready pool of loyal customers.
  • Access to bulk purchasing and supply systems.
  • Able to leverage on the franchisor's larger resources while starting a small business.
  • Able to focus on generating sales revenue and business planning to the franchisor.

Disadvantages

  • Higher initial capital outlay due to franchise-related fees.
  • Less autonomy in business direction and innovation as restricted by the franchisor's standard protocols, policies and guidelines.
  • Lower profits due to royalties and other ongoing payments to the franchisor.
  • Limited territory where the franchisee may operate or promote the business.
  • Length of term of the franchise agreement is limited and the franchisor is not obligated to offer renewal terms upon expiration.
  • Less autonomy for sale of business as the the franchise agreement will dictate certain conditions, which typically includes obtaining the franchisor's agreement.

For business owners, franchising offers the opportunity to grow the business at a faster rate when compared to developing their own business units. However franchising, if not performed and executed in the right way, could also damage the business name. Obviously, the ability to appoint competent and trustworthy franchisees is a key aspect to developing and maintaining a successful franchise system. Business owners looking to take on franchising must know what to expect and understand that while they may not have the same amount of control as managing their employees, having the right franchisees could help to ease the load of growing the business.

For people looking to acquire a franchise, owning a franchise allows them to go into business with experienced assistance and advice readily available. But franchisees are required to have their business operate in accordance to explicit restrictions as directed by the franchisor. For people who value autonomy as a major reason for starting a business, this could represent a major obstacle in deciding whether to acquire a franchise. Franchisees must be able to fulfil both the roles of a leader and a follower; lead their employees towards their own goals and objectives while being able to follow the franchisor's directions and protocols and execute accordingly.


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