Franchising - Advantages and Disadvantages of Franchising

Advantages and disadvantages of Franchising

There are advantages and disadvantages to any course of action, and choosing a franchise is no different. For the overwhelming majority of Australians who have become franchisees and operate successful businesses, the advantages have outweighed the disadvantages.

For anyone who is going into business for themselves for the first time there are many issues to consider (including asking themselves just how well-suited they really are to being self-employed).

The following excerpt from The Franchisee’s Guide (Mendelsohn, pp27-34), lists the advantages and disadvantages of franchising for potential franchisees to consider.

Advantages of Franchising

There are advantages and disadvantages to any course of action, and choosing a franchise is no different. For the overwhelming majority of Australians who have become franchisees and operate successful businesses, the advantages have outweighed the disadvantages.

For anyone who is going into business for themselves for the first time there are many issues to consider (including asking themselves just how well-suited they really are to being self-employed).

The following excerpt from The Franchisee’s Guide (Mendelsohn, pp27-34), lists the advantages and disadvantages of franchising for potential franchisees to consider.

1. The franchisee’s lack of basic or specialised knowledge is overcome by the training programme of the franchisor.

2. The franchisee has the incentive of owning their own business with the additional benefit of continuing assistance from the franchisor. The franchisee is an independent business person operating within the framework of the franchise system. This provides the opportunity through hard work and effort to maximise the return from their business and the value of their investment. In all franchise networks there are three basic levels of performance, despite the fact that all franchisees are provided with the same raw material. There are the high flyers who do extremely well, having the right attitude and approach, as well as some entrepreneurial skill which enables them to make the most of their opportunities. Then there are the average performers, who operate the system and basically achieve the anticipated performance levels and in line with their expectations earn a decent living. Their attitude and approach is sound, but they lack the flair of the high flyers. Finally there are those whose performance levels are low. These are people who joined the franchise with best of intentions, but they now lack the will or the aptitude, or have changed their mind and want to get out of the franchise. They clearly made a mistake in the first place by going into self-employment, and they perhaps deluded themselves into believing that their franchisor would remove all the risk for them.

3. In most cases, the franchisee’s business benefits from operating under a name and reputation (brand image) which is already well established in the mind and eye of the public. Of course, there will be new franchise schemes which are in the process of being established and in which the name will not yet be well known. This is a factor to recognise and to make allowance for. Picking up a sound, newer franchise in its early stages can be a good proposition but the risks are higher.

4. The franchisee will usually need less capital than for setting up a business independently because the franchisor, through their pilot operations, will have eliminated unnecessary expense.

5. The franchisor provides the franchisee with a range of services which are calculated to ensure, that the franchisee will enjoy the same or a greater degree of success as the franchisor has achieved.

These services will include:

  • The application of developed criteria for site selection and identification of trading location or, if the franchise is based upon a mobile operation, the area of such operation.
  • Guidance to the franchisee to assist in obtaining occupation rights to the trading location, complying with planning (zoning) laws, preparation of plans for layouts, shopfitting and refurbishment, and general assistance in calculating the correct level and mix of stock and in the opening launch of the business.
  • The training of the franchisee and their staff in the operation of the business format and the provision of an operations manual with detailed instructions.
  • The training of the franchisee and staff in any appropriate methods of manufacture and preparation.
  • Training of the franchisee in accounting methods, business controls, marketing promotion and merchandising.
  • The purchase of equipment.
  • Guidance in obtaining finance for the establishment of the franchisee’s business.
  • Getting the newly franchised business ready for trading and opened.

6.  The franchisee receives the benefit of the franchisors’s

advertising and promotional activities. It is usual for the franchisee to make contribution to the funds which are expended for this purpose.

7.         The franchisee receives the benefit of the bulk purchasing power and negotiating capacity which are available to the franchisor by reason of the size of the franchised network.

8.At the franchisee’s disposal is the specialised and highly-skilled knowledge and experience of the franchisor’s head office organisation while remaining self-employed in their business.

9.The franchisee’s business risk is greatly reduced. However all business undertakings involve risk and a franchised business is no exception. To be successful, the franchisee will still have to work hard. The franchisor will not be able to promise great rewards for little effort.

10.The franchisee has the services of the field operational staff of the franchisor who are there to assist with any problems which may arise from time to time in the course of business.

11.The franchisee has the benefit of the use of the franchisor’s patents, trade marks, copyrights, trade secrets, and any secret processes or formulae.

12.The franchisee has the benefit of the franchisor’s continuous research programs, which are designed to improve the business and keep it up-to-date and competitive.

13.The franchisor assembles the maximum amount of market information and experience which is available to be shared by all franchisees in their system. This gives the franchisee information which would not otherwise be available to them because of its cost or availability. Indeed, all franchisees contribute to this common fund of knowledge and experience which is available to the whole of the network.

14.There are sometimes territorial guarantees in appropriate cases which protect a franchisee from competition from the franchisor and other franchisees of the franchise within a defined area around the franchisee’s business address and in the case of a mobile franchise, a defined area of operation.

15.The recognition by the banks of the advantages of franchise financing have resulted in lending sources and terms available to franchisees which are more attractive than those offered to a non-franchised new businesses.

Disadvantages of Franchising

1.  Inevitably, the relationship between the franchisor and franchisee must involve the imposition of controls. These controls will regulate the quality of the service of products to be provided or sold by the franchisee to the consumer. It has been mentioned previously that the franchisee will own his own business. However, the business which they own is one which they are licensed to carry out in accordance with the terms of their contract. They must accept that in return for the advantages enjoyed by them, by virtue of their association with the franchisor, the control of quality and standards is essential. The franchisor will impose standards and demand that they are maintained so that the maximum benefit is derived by his franchisee (and indirectly the whole of the franchised chain) from the operation of the franchisee’s business. This does not mean that the franchisee cannot make any contribution, or impose their own personality on their business. Most franchisors do encourage their franchisees to make contributions to the development of the business of the franchised chain which their individual talent and qualities permit.

2. The franchisee will have to pay the franchisor for the services provided and for the use of the system, i.e. the initial franchise fee and continuing franchise fees.

3. The prospective franchisee may find it difficult to assess the quality of the franchisor. This factor must

be weighed very carefully by the potential franchisee for it can affect the franchisee in two ways. Firstly, the franchisor’s offer of a business-format package may not amount to what it appears on the surface. Secondly, the franchisor may be unable to maintain the continuing services that the franchisee is likely to need in order to sustain their business.

4. The franchise contract will contain some restrictions against the sale or transfer of the franchised business. This is a clear inhibition of the franchisee’s ability to deal with their own business but, as with most of the restrictions, there is a good reason for it. This provision is in the contract because the franchisor will have been most meticulous in their choice of the franchisee as the original holder of the franchise for this particular outlet. Why then should they be any less meticulous with their approval of a replacement? Naturally, they will wish to be satisfied that any successor to the original franchisee is equally suitable for that purpose. In practice, there is normally little difficulty in the achievement of successful assignments of the franchised business. Some agreements provide for the payment of fees to the franchisor to cover the costs of dealing with applications and training the new, replacement franchisees.

5. The franchisee may find themselves becoming too dependent upon the franchisor and fail to produce the personal drive which the system provides. Some franchisees lose their perspective. They delude themselves into believing that the franchisor has a duty to be so concerned about their particular business as to ensure that it has a flow of customers and to provide a day-to-day involvement, which is inconsistent with franchising as a concept.

6. The franchisor’s policies may affect the franchisee’s profitability. For example, the franchisor may wish to see his franchisee build up to a higher turnover from which he gets his continuing franchise fee, while the franchisee may be more concerned with increasing his profitability, which does not always necessarily follow from increased turnover.

7. The franchisor may make mistakes in their policies. They may arrive at decisions relating to innovations in the business, which turn out to be unsuccessful and detrimental to the franchisee. This is why franchisors are always urged to market test innovations thoroughly in their own company-owned outlets and to be able to demonstrate to franchisees the cost effectiveness of introducing new ideas.

8. The good name of the franchised business and its brand image may become less reputable for reasons beyond their control.

Type of business

The position of the franchise in the market in which it trades is a vital consideration. You should not only look at the particular franchised business in relation to its activities, but also make an assessment of the prospects for the overall industry or trade of which it forms a part. The franchise will either be dealing in goods or products, or the provision of services. The table above contains a comparison of the various considerations which should help in making an assessment. Make sure that the proposition has been well tested for a long period of time before you are satisfied that the market really exists and has long-term prospects.the market really exists and has long-term prospects.

Source: Mendelsohn, Martin, The Franchisee’s Guide, 6th edition, 1998, Franchise Council of Australia, Melbourne.