The pros and cons of franchising

Question 1

What is the advantages of franchising for the franchisor?

Answer 1

1) Cost effective expansion, given that expansion
is largely funded by franchisees capital.

While there can be significant costs in ‘replication of business’ including legal and accounting costs, documenting training and operation manuals, dealing with complying with any local legislation, these are largely one off costs.
They can support the sale of many franchised sites generating strong returns.

2) The potential for rapid, widespread expansion

• rapidly increasing brand awareness
• curtailing competitor opportunities
• bringing local knowledge to the franchise system through the franchisees.

3) The motivations of the franchisees to succeed which may surpass that on internal employees.

Question 2

What is the disadvantages of franchising for the franchisor?

Answer 2

Loss of control.
The franchisor loses direct control of the business name, brand, and often confidential systems to the franchisees.

Commercial marriage
If problems arise, the franchisor must consider the position of the franchisee as a business owner and person who has invested in the franchise, the rights of other franchisees and the impact that decisions may make on the goodwill of the whole franchise system.

Potential breach of franchise
If a franchisee changes parts of the product or service delivery system, the uniformity can be lost, and with it the value of the brand.

The franchisor does not usually have direct
control of franchisee receipts. Franchisees that are dissatisfied or simply dishonest, may understate their turnover and therefore underpay fees.

Question 3

How can a franchisor protect their assets?

Answer 3

1) Preventing a franchisee from leaving the franchise system and using the franchisor’s knowledge and
systems to establish a business in competition with the franchisor. This can be somewhat managed by contractual clauses.

2) Monitoring franchisees
whilst the franchisee is operating with the system and taking appropriate action in the event of a breach.

The process of monitoring is wrought with difficulties because it requires a commitment of human (and some electronic) resources, and it needs to be done in such a way that the franchisees, independent business
owners, do not become dissatisfied with their franchise.

Question 4

What are the advantages of franchising for the franchisee?

Answer 4

In business for yourself but not by
yourself

People can have limited or no business experience or experience within the industry.

The franchisee benefits from the franchisors experience

High brand recognition and loyalty

The franchisor will have addressed key business issues - e.g marketing, finance, product and service

There is reduced financial risk due to higher certainty e.g breakeven points, staffing needs etc.

Pooled resources in marketing, R&D and network knowledge.

Bulk buying power and bulk negotiation capabilities.

Question 5

What are the disadvantages of franchising for the franchisee?

Answer 5

Loss of control.
They must operate using the franchisor’s brand and image, thus they lose some control. Strict
conditions are imposed which restrict the franchisees which limits the ability to change focus and direct resources as the franchisee see’s appropriate.

Lack of flexibility
Franchisees might not have the flexibility to
purchase stock, plant and equipment from their desired supplier thus are limited in the ranges they can stock.

Fees and Royalties
Franchisees must usually pay fees and royalties to the
franchisor for the duration of the franchise.

Interdependent businesses
The franchisee is exposed to issues that may occur in the broader network, for example brand damage.