The accumulated experience in international franchising shows that a franchise model is one of the most effective ways of business development for firms that have already achieved success and want to develop their business further.
Franchising is often the best opportunity to start your own business for a novice businessman, a sole trader, or even someone who has never been in business.
The franchise business is considered a promising direction for the company’s development. But for this to bear fruit, you must carefully study the problem.
The key advantages and disadvantages of franchising are the basics of this technology. Franchising has advantages and disadvantages for both the franchisor and franchisee.
Table of Contents
- 19 Pros and Cons of Franchising for Franchisors
- Advantages of Franchising for Franchisors
- 1. Guaranteed Sales
- 2. Concentrate on Expanding Sales
- 3. Business Expansion
- 4. Lean structures
- 5. Less Investment
- 6. Motivated entrepreneurs instead of employed branch managers
- 7. Risk spread across many shoulders
- 8. Customer proximity
- 9. Market observation
- 10. Buying power
- 11. Early warning systems and duty to innovate
- Disadvantages of Franchising for Franchisors
- 1. Inability to terminate a relationship with a franchisee
- 2. Selection of partners
- 3. Relative independence of the partner
- 4. The dependence of the image on the partner’s actions
- 5. Possible legal disputes
- 6. Late payment and underpayment
- 7. Risk of disclosure of trade secrets
- 8. Risk of a partner leaving the network
- Quick Summary (Advantages and Disadvantages of Franchising for franchisor)
- Advantages of Franchising for Franchisors
- 20 Pros and Cons of Franchising for Franchisees
- Advantages of Franchising for Franchisees
- Disadvantages of Franchising for Franchisees
- Quick Summary (Advantages and Disadvantages of Franchising for Franchisees)
19 Pros and Cons of Franchising for Franchisors
Advantages of Franchising for Franchisors
The franchisor’s business always has a particular proven consumer market and a valuable reputation.
After the business has proved its viability with its success, the founders want to develop this business by creating a franchise system that can offer them multiple advantages such as:
1. Guaranteed Sales
The primary benefit of franchising is that he receives a guaranteed stable sales volume of his products since the franchisee is obliged to buy from him the consignments of goods, consumables, or other products/services specified by the contract.
2. Concentrate on Expanding Sales
The franchise provides an environment where owners can focus on increasing store sales.
Since the headquarters is often responsible for product development, mass advertising, and improvement of customer service manuals, member stores can operate by simply following the set rules.
The role of the merchant is to maintain and expand that store’s sales. The store products and services must be loved by residents and increase the number of users to increase sales.
It is also vital for the owner to prepare the store’s environment so that the working people can work lively.
Your store’s sales are directly linked to your income, so efforts to create a good store will lead to your income.
3. Business Expansion
Franchising opens opportunities for the franchisor to quickly expand into a new market and strengthen its reputation in an existing one.
Franchisees, rapidly expanding in a new market and investing in developing this business in new cities, create a vast network of businesses that the franchisor would never have had enough money to develop.
4. Lean structures
The system headquarters can set the general conditions for their franchise partners with little staff.
On the one hand, this is because, unlike employees, self-employed entrepreneurs are usually very motivated and enthusiastic.
Therefore, the system employees hardly have to worry about everyday business issues and can focus on strategic tasks to bring the whole unit forward.
If the partner has personnel problems, the franchisor will help with tips but not provide detailed and expensive advice.
5. Less Investment
Each franchise independently bears the initial franchise fees of recruiting and training staff, quality control, advertising, purchase of equipment, and consumables.
Together, these are significant free initial investments in the right holder’s business infrastructure, which do not require efforts to attract and control their use.
6. Motivated entrepreneurs instead of employed branch managers
Franchisees are people with an entrepreneurial spirit. As self-employed people, they usually develop more enthusiasm than is expected from employees because – the term business start-up says it – their existence depends on their start-up.
7. Risk spread across many shoulders
Every franchisee runs his business independently. The head office usually does not accept any responsibility for personal losses. Individual bankruptcies or business closures do not necessarily endanger the entire network.
8. Customer proximity
The franchisor benefits directly from the experiences of the franchisees, who are experts with expertise and experience in the respective region.
The franchisees’ high level of commitment is because they have invested their own money in the company.
In addition, the franchisees are responsible locally and therefore have the power to react quickly and precisely to customer requests and the activities of competitors.
9. Market observation
All relevant information from the franchisee, for example, about new activities by the competition, is continuously collected at the head office.
The franchisor can mix the marketing activities correctly and further develop the system.
Because market research is a relevant instrument for a company’s success in times of equalizing products and oversaturated markets, franchise companies have a significant advantage over other companies.
In the age of big data, a customer database with detailed profiles is considered a precious treasure.
10. Buying power
If you are running a self-employed business and need to order products or supplies to make your products, you are paying more money per item because your order is relatively small.
However, a franchise network has the opportunity to purchase goods at a deep discount by purchasing in bulk.
The franchisor will then be able to redistribute the products in the affiliated points by applying a mark-up thanks to the wholesale purchase.
11. Early warning systems and duty to innovate
Due to franchisees’ close contact with their customers, they encounter new trends earlier than the experts at headquarters.
Successful franchisors ensure that the observations are forwarded and evaluated quickly, enabling them to react quickly, flexibly, and appropriately to changing market conditions and consumer trends.
Disadvantages of Franchising for Franchisors
The disadvantages of franchising are not one-sided. The franchise holder also has disadvantages in such a partnership. In theory, the creation of such a business comes from him, and the leading reins of government are also with him.
However, this form of cooperation is unprofitable for franchising companies for the following reasons.
1. Inability to terminate a relationship with a franchisee
The franchise agreement defines the relationship between the franchisor and the franchisee. The franchise agreement contains several provisions that protect the franchisee.
These provisions provide for the impossibility of the franchisor to terminate the contract with the franchisee.
But at the same time, such provisions complicate the withdrawal from the system of franchisees who do not comply with the franchise business laws.
2. Selection of partners
Searching for suitable partners is difficult in times of almost full employment. Although the systems have developed detailed selection procedures, mistakes still occur repeatedly.
Unlike in a branch system, separating franchise partners is complicated; a simple contract termination is not easy.
3. Relative independence of the partner
When a person buys the franchise, he becomes a company partner and independent entrepreneur.
And this means that it will be difficult for the franchise holder to control the course and quality of transactions carried out by a partner under his name.
4. The dependence of the image on the partner’s actions
Most consumers perceive companies that operate under the same brand as a single company’s network.
Therefore, the franchise buyer’s actions are immediately reflected in the company’s image as a whole.
If it is bad business conduct, the entire network will suffer along with the leading company.
5. Possible legal disputes
Success has many fathers, as the saying goes. In the franchise, the franchisee claims economic success for himself since he is fighting at the forefront and winning the customers.
Especially in times of upswing, the franchise partner can find the control activities of the system disturbing.
Legal disputes are not uncommon in this case, and the franchise relationship can also be dissolved. Smart franchisors may offer arbitration or mediation procedures.
6. Late payment and underpayment
In the practice of companies that have acquired a franchise, late payment of royalties often occurs, especially at the beginning of doing business.
In addition, royalty is often set as a percentage of income. The franchisee must report its profits to the parent company.
But there are cases when he tries to hide the amount of income to reduce the number of mandatory payments.
7. Risk of disclosure of trade secrets
Perhaps one of the most significant risks for franchising is the difficulty of maintaining the confidential information they are required to provide to a partner.
For regular operation, one needs to know the enterprise’s standards, principles, methods of operation, product formulations, and so on.
All this is the property of the franchisor and is a trade secret for him. But the partnership is impossible without sharing them with the franchisee.
The only thing that saves the company from such situations is an agreement that the franchise buyer undertakes not to disclose such information. However, in practice, these agreements are not always respected.
8. Risk of a partner leaving the network
A successfully developing franchisee, as a rule, eventually feels constrained and limited by a partnership agreement. The franchisee often leaves the network, not finding suitable ways to develop the business further.
As a rule, then he creates a similar business, using the accumulated experience and directly competing with the franchise network.
Quick Summary (Advantages and Disadvantages of Franchising for franchisor)
|The rapid expansion of sales markets, increase in sales volume, and territorial expansion of business.||Receiving a smaller share of the profits from a trade franchise enterprise than from one’s own|
|No expenses for the maintenance of a vertically integrated management network, i.e., reduction in personnel costs||Setting up the franchise system takes time|
|The lower level of own capital investments||No customer contact outside of your business area|
|State registration of the franchise agreement||Fewer control options than in branches|
|Raising the prestige of the company and its trademark, recognition from the clientele, and growth of confidence in the quality and uniform range of the company’s products.||The low reputation of one of the franchised enterprises in the absence of proper quality control may affect the company’s reputation.|
|Income from the sale of a license||Difficulties in controlling the reliability of the financial statements of the franchisee|
|Profit from the possible leasing of real estate and equipment to the franchisee||Difficulties in recruiting a franchisee competent in the basics of business|
|Profit from possible lending to franchisees and shortened turnover periods||By training the franchisee, the franchisor is preparing a potential competitor.|
20 Pros and Cons of Franchising for Franchisees
Advantages of Franchising for Franchisees
Apart from a good reputation and becoming a part of a well-established business, the franchisee can have the following advantages:
1. Ready Business Plan
The tried-and-tested business model is often considered the most important advantage for business founders who enter an existing franchise system.
However, a system that has already been successfully established at 50, 100, or several hundred locations is no guarantee of success. However, it has proven that the market and customers accept it.
Based on the experience of the network, the parent company has already optimized and adapted the range to market requirements.
In this way, the business founder avoids classic starter mistakes such as incorrect product offers in the network.
Furthermore, the system’s business processes and work steps have probably been standardized and streamlined over the years to make it as easy and profitable as possible for many partners to implement.
2. Enter even if you are inexperienced
In the case of a franchise, even inexperienced industries or those who want to start a business from scratch can enter the business. Usually, if you want to own a store yourself, you must first lay down the business and management related to that industry.
In franchises, besides providing know-how on management and operation, training systems are well-developed, and operations are often manualized, so it is possible to operate stores without business or management experience.
Even those who have given up on independence because they have no experience may be able to fulfill their dreams with a franchise.
3. Famous brand
Many franchise systems are market leaders in their niche. Some even have a market monopoly-like position.
Ideally, the brand has a high level of awareness nationally or even internationally and ensures the franchisee has good customer potential right from the start.
The franchisee does not have to put money into brand building, management, or corporate design.
Also, the designs and content for advertising and marketing such as image brochures, TV or radio spots, advertisements, internet or social media should be fully developed and made available by the franchisor or the head office.
4. Business experience
A small company gains experience from a large firm when it cooperates, entering a commercial concession. Franchise owner shares success secrets and gives business instructions.
It is much easier than “treading the path” yourself. After all, the franchisor is interested in how its partner thrives and brings him profit.
5. Help and training
The franchisor is interested in a quick start for the partner. Therefore, he conducts training in entrepreneurship basics, helps recruit staff, or finds premises for rent.
6. Advertising and marketing
When starting your own business, advertising costs are very high (often comparable to the cost of a franchise).
On the other hand, the franchisor uses proven and effective advertising channels for the product or service, helps to draw up a marketing development plan, and provides materials for maintaining social networks and the website.
Some companies use federal corporate advertising. But for this, they may require advertising deductions.
7. Suppliers and contractors
A businessman is forced to look for contractors while starting on his own. The franchise provides a database and contacts of trusted suppliers.
Some business areas profit after developing automated systems, programs, and services.
The franchisor can provide solutions in which money and time are invested – CRM systems and online platforms. Developing tools is time-consuming and costly if done from scratch.
9. Loan Guarantee
All banks issue business loans. The chance of approval of the application is higher with the guarantee of a well-known trust firm or the provision of an already implemented financial plan.
10. Labor Division
The principal is the head office and manages and directs the franchisees to operate on-site and sell.
It is estimated that sole proprietors spend 60 to 70 percent of their working hours on unproductive activities such as bookkeeping, customer acquisition, maintaining contacts, purchasing, or billing.
The head office takes on much of this work in franchise systems and relieves its partner companies on site. In addition, it can do this for the entire network much more efficiently than for each company.
The relief enables the franchisees to focus their workforce more on their core business to focus on sales and customer service.
Disadvantages of Franchising for Franchisees
More obvious are the disadvantages of working together for franchisees. But still, it is worth talking about them separately and in detail.
1. Lump sum and royalties
The entrepreneur does everything with his own money. In addition, he pays a lump-sum payment when concluding a commercial concession agreement.
And after that – royalties – monthly (or quarterly) deductions from the proceeds in the amount of a certain percentage for the services the trademark owner provides.
Cost is the main downside. Royalties often become the cause of litigation.
2. Inviolability of the contract
The entrepreneur must strictly adhere to its requirements by signing a franchise agreement. Failure to comply with these requirements leads to a break in relations with a partner.
He cannot make changes to the contract, but he can express his ideas and proposals to the parent company for possible improvement of the positions of the contract.
3. Business restrictions
The franchisee must strictly comply with the rules outlined in the contract for doing business, using a trademark, maintaining financial records, and so on.
Also, such rules can regulate the range of products, the territory of their sale, the number of working hours, and other points. It does not always allow you to respond to market needs quickly.
4. Cooperation, not competition
Since the franchise is sold to multiple entrepreneurs, they are market competitors.
But the franchisor requires cooperative relations between them since only such relations will help the development of the network. For a single franchisee and its business, this is not always profitable.
5. Insufficient support
Before signing the contract, the future franchisee must carefully consider how much support the franchisor provides to its partners.
Familiarizing yourself with the system and individual aspects of doing business is necessary.
Some franchisors have the sole purpose of selling as many franchises as possible. It is not the basis for running a successful business.
6. Company’s financial insolvency
If it turns out that the franchisor is financially insolvent, the franchise can be sold to another entrepreneur or ultimately canceled. Then the franchisee will be left with nothing.
7. Management depends on brand image
Franchise stores can take advantage of the name and brand power of the headquarters.
On the other hand, if the headquarters company or an affiliated franchise store is fraudulent, it will be damaged even if another store causes it.
8. Strong standardization
Standardized systems such as those of franchising, on the one hand, simplify the entrepreneur’s activity but, on the other hand, prevent him from experimenting with innovative ideas or projects and taking any initiative (launching campaigns, promotions, discounts).
9. Resale Difficulty
Could you decide whether to sell your franchise to someone else? No, you won’t be able to do it at your leisure. Your buyer will first need to be approved by the parent company.
10. Low level of reactivity
Even if the market requires a certain flexibility and a willingness to change, before the franchisee can change its strategy to embrace new management policies, it must wait for the franchisor’s approval, accepting the timing necessary for transforming his business.
Quick Summary (Advantages and Disadvantages of Franchising for Franchisees)
|Opportunity to become an independent businessman with minimal initial capital investment, with comprehensive support from an experienced franchisor.||The control exercised by the franchisor leaves less autonomy in the business.|
|The franchisor can assist in accessing credit resources, both commodity and monetary.||Little influence on overall strategy/business policy|
|Instant reputation among consumers by doing business under a recognized trademark or trade name||Loss of reputation by the franchisor will lead the franchisee to lose their reputation|
|The opportunity to use the results of large-scale promotional activities, scientific developments, and marketing research conducted by the franchisor for a moderate fee||Services provided by the franchisor, such as mandatory contributions to the general advertising fund, can be a significant cost item for the franchisee|
|Security of constant supply||The risk of deterioration in the market position if the franchisor sells his business|
|The possibility of acquiring fixed assets from the franchisor through leasing or at residual value||The likelihood that advances in technology, changes in legislation, or consumer needs will lead to bankruptcy because franchisees usually sell a narrow list of goods and services|
The franchise is a system that allows you to use the store’s name, services, and management know-how by paying royalties to the headquarters.
If you try to open your own business, it may take time and money, and you may not be able to concentrate on management due to various miscellaneous tasks.
However, if you are a franchise store, the headquarters will support you, so you can concentrate on running the store.
If you want to start a business but find it difficult because you have no experience, we recommend you consider a franchise. There are various industries, so please try to challenge the field you are interested.
(Last Updated on August 19, 2022)