What are the advantages and disadvantages of franchising?
The advantage of the system is that there is a blue print for success, a track record and proven formula. The process is highly regulated by the franchisor so that the success can be replicated by the franchisee.
The Franchisor must invest in an infrastructure that can service the training and support needs and contractual obligations of its franchisees. But the right concept, franchised effectively, can be an effective expansion strategy for the franchisor.
For franchisors, the chief benefit is that they do not need a large amount of capital to expand the brand rapidly, certainly less capital than if they attempted to expand it themselves. The franchise fees and royalties they collect allow them to build their brand without sacrificing control to investors or banks. Additionally they do not have the psychological or cash flow pressure of repaying lenders.
The fees and royalties can be used to fund their infrastructure, train and support franchisees, improve the quality of goods and services, and market and build the brand in the marketplace.
For franchisees, benefits can include a blueprint for success, mentoring from the franchisor who has proven experience and a financial interest in their success, shorter launch time, help in developing a business plan, initial training, and ongoing support. All the legal and financial setup issues have been thought through and resolved. In effect the risk of failure is significantly reduced.
Franchisees will also get help to find an optimal site, the selling power of an established brand, the may achieve lower costs through group purchasing, use of an established business model, national and regional advertising campaigns, perhaps customer lead generation, a network of fellow franchisees who can provide advice and moral support, perhaps use of a forum or intranet, annual conferences, franchisee associations, and perhaps even assistance with securing funding.
For the franchisee, the obvious issue is the payment of the fees and royalties. This means that the first tranche of their earnings always goes to the franchisor, and the second tranche to the tax collection authorities! There are cost of sales to pay, so the profit margin is always going to be thinner than if they were operating independently.
There is a lack of autonomy and independence. Everything is prescribed and specified, from the goods and services, the décor, company-wide promotions that may not be effective for them, compulsory redesign of their store.
There is even a risk of a change in management of the franchise that may take the brand in a new direction. They may be locked into a contract and unable to influence important business factors.
So there are no absolute guarantees, and some trade-offs are made by the franchisee – loss of autonomy, effectively working for a large organisation, running your own store. But on the other hand they get the benefits of a blueprint, and administration details are sorted out.
Franchisees need to be comfortable with the culture, values and goals of the franchisor. This should be assessed in the same way as you would consider the culture, values and goals of a potential employer.
A franchise is usually for a fixed time, with each year or period requiring renewal, which may be refused if performance is unsatisfactory.
The Franchisor must invest in an infrastructure that can service the training and support needs and contractual obligations of its franchisees.
The franchisor needs to clearly communicate to the franchisee details of the tools and systems needed to run a successful franchise. This should include processes and documentation for all aspects of the business including recruitment, training, purchasing, operations, and finance. Sales and Marketing literature should also be provided.
They must manage and control the franchisees carefully and employ staff to monitor adherence to standards. They will constantly need to train new staff at franchisees, who will have a significant turnover because of the sectors in which they operate.
Each party has obligations to the other. The franchisor needs to protect the trademark, and control the concept, so will insist on standardisation and strict adherence to their rules and guidelines. Signage, logos and trademarks will have to be used exactly as described in the contract. Uniforms will be standard.
The franchisee has to carry out the exact services the trademark is known for and does not have the option of altering or personalising them. They are not in control of the business in terms of improvements and developments.