Franchising as a system when operated correctly can be advantageous to the franchisor and the franchisee. Listed below are the advantages of franchising:
A franchise business eliminates the risk of learning from a completely new business. This is due to the fact that the franchisor has already set up his business and gone through a process of learning, before expanding his business by way of franchising. Thus the risk of whether the business will be successful or not is much lower for the franchisee.
A franchise is part of a network. As this network grows, the opportunity for the individual franchisee to grow also increases. The name of the franchise begins to become well known because people see it everywhere. A huge network also projects a look of a successful network. The franchise begins to squeeze out competition through its sheer size.
Ease of Financing & Operational support:
Many a times, a franchisor may help the franchisee in obtaining financing for the setting up of the business. Many franchisors are involved in the selection of the site and in designing the business interiors and exteriors as well. Usually, enough training and consultancy is given to the franchisee by the franchiser on the product / service and on handling the day to day operations of the business
Advertising costs are greatly reduced because the advertising cost is shared by the franchisers. So, the franchisee enjoys a national exposure at an affordable price.
Disadvantages of Franchising:
Royalty / Fees:
The franchise fees or the royalty that may be required to be paid may be relatively steep for a successful brand. The franchise fee is normally paid only at the time of starting or renewing the franchise agreement. Royalty on the other hand, is a recurring cost which has to be paid to the franchisor at a predefined frequency.
Lack of control:
Franchising requires adherence to the stipulated terms and conditions as laid down by the franchisor. There are also terms that grant the franchisor the right to terminate the franchise agreement if the policies and regulations prescribed are not observed.
Though franchising can be a very profitable business arrangement for the franchisor and the franchisee, if not entered into properly or looked after well, it could prove quite the contrary. For the franchisor it may not always be very easy to find the right person for the franchise, also if the franchisee acts independently it may result in the loss of good will / dilution of the brand.
The International Franchising Scene:
Franchising is becoming an increasingly popular method of international distribution. As more and more companies use this business concept to reach national and international markets, the strategies and operations involved in franchising continue to mature.
Franchising represents a great way to develop a national brand. There are four critical success factors that, when combined can help create a powerful national brand: investment in the franchise infrastructure, an unwavering focus on franchise economies, aggressive unit growth and increased scale. Functions such as training, franchise sales, marketing, new product development, public relations, real estate and technology are all crucial. An investment in a fully developed franchise system requires a long term view.
The most important aspect in developing a national band is the continuing focus on franchisee economics. The two key aspects of franchisee economics are the turn key development costs, (franchise fee, build costs, working capital, inventory, initial marketing) and the annual cash profits an owner /operators can generate.
With a strong infrastructure in place and a successful economic model, a company is well positioned to materially accelerate its unit growth. A comprehensive infrastructure attractive franchisee economics and strong unit growth can combine to cerate increased scale. The large a chain becomes, the great is the opportunity to gain economics in areas such as purchasing advertising and brand recognition.