Franchising Advantages and Disadvantages: Franchising is the name given to an arrangement wherein a specific party or franchiser concessions some rights and jurisdictions to the other party or franchisee. Franchising is an excellent marketing strategy to expand businesses in the modern world.
A contractual settlement occurs among the Franchisor and the Franchisee where the franchisor approves the franchisee to market their products, goods, services, and rights to utilise their label and brand name in the market along these franchisees operating as dealers.
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In acknowledgment, the franchisee meets a one-time commission to the franchisor and some portion of taxation.
Franchisees do not need to spend capital on coaching employees since they receive education about business procedures.
Franchising is a virtue that entrepreneurs provide to such other applicants. The right as mentioned above, right enables the recipients to market the products or services of certain manufacturers or parent businesses within the stock market.
It is essential to note that these rights could also be access to the intellectual property rights of owners.
Individuals or businesses that grant the franchise’s claim are referred to as the franchisor, and the recipient of this right is named the franchisee. Franchising is a type of business marketing policy that helps franchisees to cover the maximum market shares.
To put it quite simply, franchising is a marketing relationship between two entities where one specific party favours another party to market their commodities and intellectual property. For instance, various fast-food businesses like KFC and Subway run in India via franchising.
What is Franchising? Advantages and Disadvantages of Franchising 2021
Franchising gained attention in the 1950s. Ray Kroc, a successful businessman in 1984, saw the potential in franchising to successfully boost the southern Californian hamburger stand that some of the brothers owned.
Franchising is a kind of marketing and distributing strategy where the owner of a specific business authorizes an individual the right to operate a company that markets a product or provides any services using the granters business policy.
It is vital for anyone resolving to start a business by becoming a franchisee to learn that the franchisee is connected to a partnership agreement.
Three Types of Franchises
- The first type of franchise is where the business is licensed by the franchiser through a format, an operating system, and trademark right documentation.
- The second type of franchise includes a supplier-dealer setup involving product distribution. The franchisor awards the franchisee license for selling assets by using their trademarks and name but excludes operating systems processes to run the business.
- The third type is a kind of manufacturing unit, where the franchisor grants the franchisee to produce their products and market them under the company trademarks.
- When the procurement of a franchise is performed, the franchisee must comply with the strict guidelines and all rules concerning the operation of the company. These guidelines are placed to sustain brand uniformity.
This article aims to explain in great detail the following about Franchising:
- Advantages of Franchising
- Disadvantages of Franchising
- Comparison Table for the Advantages and Disadvantages of Franchising
- FAQS on Pros and Cons of Franchising
Advantages of Franchising
- Encourages Multi-Unit Extension: An essential benefit of the process of franchising is that it allows anyone to obtain the multi-unit extension advantage for their businesses.
- Formulates Capital for Extension: The method of multi-unit extension demands a large amount of capital for the improvement and better performance of new sections. Franchisees must invest their wealth, including their savings and loans, to fund the establishment of their new franchised sectors.
- Supports Management Skills: The process of multi-unit extension requires skilful, trained, and motivated individuals to control and operate new sectors. Franchisees provide management skills needed for new areas, and, most importantly, they have a fixed interest in the business’s success.
- Forwards Prosperity of Scales – Franchising is solely concerned with unit extension and replication of business systems, supplying sources, and operational regularity. Franchising enables individuals to increase their acquiring power and realise economies of scale with their suppliers. These economies can even stretch to marketing, where they and the franchisees usually combine resources to establish mutual funds.
- Designs a Reformed Revenue System – When people usually franchise, they create a fresh business and profit from those fees and charges paid to these individuals by the franchisees.
When these franchisees join on board and sign a franchise contract, they meet an initial franchise charge, and the ongoing franchisees meet weekly or monthly payments that are simply a percentage of their company gross sales amount.
Disadvantages of Franchising
- Value: Although an individual has invested in franchising their company, ongoing franchising claims the investment of their time and money. As a franchisor, the individual would be starting a new industry, and as time progresses, they will require to invest in their franchise scheme.
- Administration: The franchising industry is well coordinated. Before anyone offers to market a franchise, they must first work with a franchise lawyer to develop a particular franchise contribution consisting of an FDD or franchise disclosure document. As an ongoing franchisee, people need to comply with the laws and regulations of the federation strictly.
- Franchise Negotiations are very Contentious: Once a business has been franchised, the owner must sell them to qualified franchisees through money exchange. While an individual might receive interest from others who know about their business and wish to purchase a franchise, owners need to invest in marketing, developing relationships with franchise brokers, and building good public relations so that a qualified individual can run their business.
- Less Command: In comparison to organic expansions, where owners own every sector, similarly in a franchise, all franchisees have control over the business and operate accordingly, in different locations. Hence, owners have less control. Franchising must include the training to meet the high standards for the operation of a successful business.
- Demands Time: Successfully constructing a solid franchise system requires time and patience. Individuals who wish to build franchises must give time to franchisees and the business for successful marketing.
Franchising Advantages And Disadvantages In Tabular Form
| Advantages | Disadvantages |
|---|---|
| 1. Established business model | 1. High initial investment required |
| 2. Proven track record of success | 2. Limited flexibility in running the business |
| 3. Access to established brand and trademark | 3. Ongoing royalties and fees to the franchisor |
| 4. Training and support provided by the franchisor | 4. Limited control over business decisions |
| 5. Marketing and advertising support from the franchisor | 5. Possible restrictions on suppliers and products |
| 6. Shared risk between franchisor and franchisee | 6. Possible conflicts with other franchisees |
| 7. Easier to secure financing for a franchise | 7. Dependence on the franchisor for continued success |
| 8. Potential for faster growth compared to starting a new business | 8. Franchisee may not have full control over pricing and promotions |
Comparison Table for Advantages and Disadvantages of Franchising
| Advantages | Disadvantages |
| It allows anyone to acquire a multi-unit extension advantage. | The value of investments and time and money is very high and may pose trouble for first-timers. |
| Franchisees invest their wealth, savings and loans, to fund the establishment of their new franchised sectors. | The administration needs to be done by correspondence of a Franchising lawyer. |
| Franchises train individuals to possess skills integral to the business. | Franchise negotiations are pretty contentious and owners need to coordinate the system. |
| Sales prosper and the result is very profitable for the business. | The sectors are managed by various franchisees hence control of ownerless. |
| The revenue system is reformed for the better. | Franchise businesses demands a lot of time. |
FAQ’s on Pros and Cons of Franchising
Question 1.
What should you consider before purchasing a Franchise?
Answer:
The things to consider are:
- Experience required
- Understanding of the business requirements
- Time commitment
- Track record of the business
- Cost to get started
- Amount needed for the continuation of operation
- Terms and conditions of the franchise (whether terminated or renewed).
- The financial situation of the owner and the company.
Question 2.
Who is eligible to become a franchisor?
Answer:
If an individual wish is to become a successful business owner, they must possess the following qualities:
- Good at communication
- Honest
- Aims at success
- Work-minded
- Knowledgeable
- Has the willingness to learn, perform and meet demands
- Hard-working
Question 3.
What are the standard terms related to franchising you should know?
Answer:
They are:
- Franchise: A partnership license agreement
- FDD: Franchise Disclosure Document
- Product distribution franchisee: A franchise where the products are sold according to laws.
- Trademark: Brand name and logo of the company.