Advantages And Disadvantages Of Franchising (Updated, August 2012)

By Jackie, Researcher

Topic: Business (Franchising)

The objectives of this research are to find out what are the major advantages and disadvantages of buying a franchise from the franchisee’s perspective. Basically, franchise is the practice of using another firm’s successful business model.

The benefits and drawbacks of buying a franchise

Franchise is a method of marketing and distributing based on a two parties relationship; 

that is the franchisor (the owner and granter of right) and the franchisee (recipient of right) relationship.

                

                Franchise or ‘business cloning’ is becoming more popular currently and it looks like a rapid growing trend of setting up a business nowadays as well as a strategic method for entrepreneurship as it usually carries lesser risks compared to conventional business start ups. Friendly speaking, franchising maybe a particularly good choice for ‘uncreative people’ who wants to start a business but has no prior business experience. It is advised that potential franchise owners should be aware and analyse all its benefits and drawbacks in detail before they decide to purchase a franchise.

Big Mac is a proven product of McDonald’s.

                Firstly, the most compelling advantage is the franchise offers a proven idea, product or service within an established market. This will definitely cut down research, experiment and survey costs as the potential franchise owners need not have to worry about the acceptability of a particular product or service by the general public. They also can save a lot of money, time and effort as they do not need to do market analysis like PESTEL analysis (Political, Economic, Social, Technology, Environment and Legal) nor SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) as these types of analyses have already been done by the franchisor. 

Starbucks’ logo is an image of a "twin-tailed mermaid, or siren as she's known in Greek mythology.

                Secondly, the purchase of a franchise with an established trademark or recognized brand name provides franchisees with considerable market power and reputation. For instance, the purchaser of a Starbucks’ franchise has a trademark with proven market power. The good thing about this is the owners no need to struggle for years in order to build up a good brand name or image which we commonly see in new entrepreneurs who have just stepped into the business world and wished to form their own products and company. Seriously, it is not easy to build a new brand name by our own efforts nowadays as there are too many brands out there whereby the competition is extremely high. 

Full training is provided for each step by the McDonald’s training team.

                Thirdly, another attractive benefit of purchasing a franchise rather than owning a store outright is the notion that the franchisor provides the franchisee ongoing support in terms of training, technical expertise, product updates and management assistance. These benefits are not available if a person plan to run a business on his or her own, thus making the process of operating a business other than franchise seems to be more difficult as the owners have to be more independent. A popular slogan in franchising is that people buying franchises to “be in business for themselves but not by themselves”. In short, the beauty of franchising is the availability of guide or “mentoring”.

Campaign allows KFC to communicate its message and brand to wider audience

                Fourthly, an established marketing network is usually provided. In other words, the franchisees do not need to do marketing on their own as the franchisor will do it as a whole. Just imagine if a person venture into a business which is not franchise, he or she has to struggle to attract customers by advertising. The point is if a person runs a business on his or her own rather than franchising, then most likely the advertising will be ineffective and not as successful as franchise. This is because franchise has its own marketing network plus the summation of all collectable advertising fees from all the franchisees creates a large pool of money where they can use a more expensive modern approach of advertising such as advertise in television, radio and billboards.

Pizza Hut’s truck.

                Fifthly, relationship with suppliers has already been established once a franchise is bought. The owners do not have to worry about getting reliable, trustable and good suppliers on their own. Besides, the prices of goods are usually cheaper due to economy of scale too. Even if the inflation sets in, the franchisee will be less affected as compared to other form of business because goods are ordered in a very large amount by the franchisor before distributing it to the franchisee and this enables the trade discount to take place too.

Total estimated initial investment for Freddy’s Frozen Custard & Steakburgers.

                This is however, there are certain major drawbacks of which the potential franchise owners must take into consideration before they make up their mind especially the initial cost of purchasing and setting up a franchise operation as they could be quite high. Therefore, usually franchise owners will suffer a huge amount of cash outflows at the beginning before they can enjoy profits. This is because, a large sum of money has to be paid for the trademark, necessary renovation to make the franchise looks identical with the others, purchase of furniture, stocks, machinery, payment of salaries and so on.

Royalty fee reduces profits

     

                Besides, the distribution of profit will be smaller as the franchisee is required to pay ongoing royalty fee usually monthly and is typically calculated as a percentage of gross sales, not net profit. This is to avoid franchisee from manipulating his or her franchise expenses in order to reduce net profit and this will directly reduce the royalty payment. The point is when royalty is computed based on sales, as long as there is a revenue even the franchise is making losses in a particular period, the franchise owner is still required to pay the royalty fee. When this situation arise, it is like “add salt to the wound”.

Restrictions on creativity

                Furthermore, there is a restriction on creativity. Many franchise systems are very rigid and leave little opportunity for individual franchisees to exercise their creativity. This is an often-cited frustration of franchisees. This is because most franchisors impose appearance and design standards, thus limiting the ways a franchisee can operates his or her franchise. Although, these standards can help in promoting uniformity, they can also limit franchisees’ new ideas and ability to cater to local tastes or needs.

KFC apologises to i-City outlet assault victim

                 In addition, if some of the franchisees in a franchise system starts performing poorly and makes an ineffective impression to the public, this can somehow affect the reputation and eventually the sales of a well-run franchise in the same system. In short, although all the franchises operate independently, but they are still inter-related and connected. For example, there is a recent case in Malaysia where a man was assaulted by a KFC’s kitchen crew member at its i-city branch in Shah Alam. A video recording of the assault went viral on YouTube. KFC’s reputation was damaged because of this incident and the fast food chain’s deputy president had met and apologized to the victim.

Sometimes a franchise agreement can be too strict and seems to be unfavourable 

                Moreover, there are also some issues relating to the duration, nature of the commitment and problems of termination or transfer. For a variety of reasons, many franchise agreements are difficult and expensive to terminate or transfer. Furthermore, virtually every franchise agreement contains a non-compete clause. These clauses vary in term of severity, but a typical clause prevents a former franchisee from competing with the franchisor for a period of two years or more. Often, a franchise cannot terminate a franchise agreement without paying the franchisor substantial monetary damages.

                In conclusion, the future of franchising is still bright. As franchising continues to become a more pervasive form of business, regulators and franchise associations are likely to intervene in ways that strengthen the viability of the franchise concept.

Additional readings, related links and references:

The Benefits of Franchising

http://www.youtube.com/watch?v=KCObP7-5dwE

Should You Buy A Franchise?

http://sbinfocanada.about.com/od/franchiseinfo/a/buyfranchise.htm

The Advantages and Disadvantages of Franchising

http://emievil.hubpages.com/hub/The-Advantages-and-Disadvantages-of-Franchising

Purchasing a Start-Up Franchise? Here are some Advantages and Disadvantages

http://www.franchiseknowhow.com/buying_franchise/prosandcons.htm

What Are the Benefits & Drawbacks of a Franchise?
http://www.ehow.com/list_6811866_benefits-drawbacks-franchise_.html