Advantages and disadvantages of franchising

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Advantages and disadvantages of franchising

This article examines some of the advantages and disadvantages of franchising. Franchising is a business model in which a company grants a license to an individual or a business to market and sell a particular product under that company’s brand name. Under this model, a company can extend its reach and supply its product/service to a region or even around the world from one central location. However, franchising has some disadvantages as well.

 

What is franchising?

Franchising is a business model that enables an existing business to license its brand name to a new party who then has to adhere to the same rules and regulations that the franchisor has to follow. According to International Franchise Association (n.d.) franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship. The franchisor gives the franchisee the right to undertake business in a specified manner under the franchisor’s name in return for a royalty payment.

 

Examples of Franchise

According to Franchise Direct (2021), the top 20 global franchisees are McDonald’s, KFC, Burger King, 7-Eleven, Domino’s, Ace Hardware Corporation, Century 21, Papa John’s Pizza, Taco Bell, Pizza Hut, Wendy’s, Dunkin, Subway, Chick-fil-A, Tim Hortons, Marriott International, Servpro, Jersey Mike’s, Re/Max, and Interim Health Care.

 

Purpose of franchising

The main purpose of franchising is to expedite the growth of a brand name without sacrificing the quality of the product. There are also some other reasons as to why a business may choose to franchise its operations. For example, franchising may be a logical choice for it if its market potential is substantial, and if it has good relationships and connections with suppliers. Similarly, it can also be an economical and cost-effective strategy for growing the business.

 

Advantages of franchising

There are several advantages of franchising from the perspectives of both franchisors and franchisees. The franchiser is the owner of the trademark, patents, and unique selling proposition, while the franchisee receives the licence to use the trademarks, patents and unique selling proposition of the franchisor.

 

Franchisors retain a lot of control in the business and make substantial financial gains in terms of initial deposit and subsequent royalty payments they receive from the franchisees.

 

Another advantage for franchisors is that franchising is a rapid growth method. Franchisors can grow their business faster because franchisees are usually very motivated and put a lot of efforts to make the business successful. Also, as the growth drive of both the franchisor and franchisee merge together, the result is of often very positive.

 

The franchisors do not have to invest any money in setting up a new business. They also do not have to take any significant risk. They only need to ensure that the franchisees are operating in line with the contractual agreements, and they are supported adequately.

 

The franchisees also have a lot of advantages. For example, imagine being a McDonald’s franchisee. The franchisee benefits from the brand name that is recognised worldwide. Consequently, the risk of business failure is significantly reduced.

 

Often prior experience is not required to be a franchisee. The franchisor will train that franchisee and ensure that they have right knowledge and skills to operate the franchise. In addition, the franchisee receives continuous support from the franchisor.

 

The franchisees can also sometimes benefit from the strategic relationships that the franchisors have developed with suppliers and other partners that allow the former to purchase goods at a lower cost compared to the prices paid by independent owners of a similar business (Franchise Direct, 2021).

 

According to Plummer (2021) franchising has many opportunities with low start-up costs. It is true that getting a franchise agreement from big giants such as McDonald’s and Burger King are expensive and time-consuming; however, there are many companies out there in the global markets that offer different franchising opportunities which are very affordable, hence attractive.

 

Disadvantages of franchising

There are a number of disadvantages of franchising for franchisors. For example, the franchisees may gain substantial knowledge of how to do the business and subsequently run their own and independent business. Likewise, franchisees are independent, and therefore, franchisors cannot manage them as closely as their own employees.

 

On the other hand, the franchisees have a number of disadvantages as well. For example, the franchisors will determine how they can run the business. Therefore, they have very little room to apply their own creativity in the business.

 

Franchisees may also suffer from chain effect. For example, if one franchisee draws negative media attention, or performs bad, this may have knock-on effects on the entire chain. In addition, the franchisee must share profits with the franchisor. Usually, a fixed percentage of the total profit the franchisee makes in a year will go to the franchisor.

 

Conclusion

To sum-up, franchising is a rapid growth business model. Unsurprisingly, there are millions of franchise establishments around the world. However, like all other business models, this model has advantages and disadvantages as well. Therefore, entrepreneurs must conduct detailed research before deciding whether they should embark upon a business journey under this model.

 

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If you liked any of these articles, please feel free to share with others to support our educational research.

 

Last update: 10 April 2022

References:

Franchise Direct (2021) Top 100 Franchises 2021, available at: https://www.franchisedirect.com/top100globalfranchises/rankings (accessed 10 April 2022)

International Franchise Association (n.d.) What is a Franchise, available at: https://www.franchise.org/what-is-a-franchise (accessed 10 April 2022)

Plummer, M. (2021) Four reasons you should consider franchising — and how to find the right franchise, available at: https://www.forbes.com/sites/forbestechcouncil/2021/01/14/four-reasons-you-should-consider-franchisingand-how-to-find-the-right-franchise/?sh=50471bda1177 (accessed 09 April 2021)

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Author: M Rahman

M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.