Franchising: Advantages AND Disadvantages

by Martin Russell on August 30, 2011



Guest Author: John Di Natale

Is franchising a guarantee of success? Absolutely not. And naturally, there are advantages and disadvantages or using franchising as a means of developing your business as a franchisor, as there are with being a franchisee. Assuming that the franchisor’s business is sound and it is able to provide an appropriate level of service, the following are a few brief points no each side of the ledger:

Advantages of Franchising

  • The franchisee buys into a business that has an established name, brand and track record of success.
  • The franchisee has access to use the franchisor’s patents, trademarks, copyrights, operational methodologies and any trade secrets.
  • The franchisee owns the business but is able to draw upon continuing assistance from the franchisor an dhte franchisor’s field operations staff.
  • The franchisor may negotiate better rates of finance or more favourable conditions for franchisees with financial institutions.
  • The franchisor provides the advice and/or help in identifying and negotiating suitable locations or operating territories for the franchisee.
  • The franchisor helps the franchisee with location design and fit out, stock quantity and mix, and opening promotion.
  • The franchisor trains the franchisee and in many cases, the franchisee’s staff as well
    benefits from the bulk purchasing power and negotiating capacity afforded by the size of the franchised network
  • The franchisee has the benefit of the franchisor’s continuous research and development programs, which are designed to improve the business and keep it up-to-date and competitive.
  • The franchisor provides a knowledge base developed from its own experience, as well as that of all the franchisees in the system, which would otherwise be impossible for a non-franchised business to access.
  • The support and benefits provided by a franchise system greatly reduce a franchisee’s business risk.

Disadvantages of Franchising

  • Whilst the franchisee owns the franchised business, inevitably, the relationship between franchisor and franchisee must involve the imposition of some controls. Franchisees must accept that in return for the advantages enjoyed by them by their association with the franchisor and other franchisees, the franchisor will wish to exercise control over some key aspects of the business.
  • The franchisee will have to pay the franchisor for the use of the system and for servcies provided on an ongoing basis in the form of an initial franchise fee and continuing fees.
  • The franchise contract will generally impose some conditions upon the sale or transfer of the franchised business that allow the franchisor to determine an appropriate replacement should the franchisee with to move on to other opportunities. This may slow the sale and transfer process. There may also be a transfer fee payable on conclusion of the arrangement.
  • The franchisor’s policies may affect the franchisee’s profitability. For example, the franchisor may wish to see the franchisees drive sales growth from with the franchisor draws its continuing fees, whereas the franchisee may be more concerned with increasing profitability.
  • The good name of the franchised businesss and its brand image may become less reputable for reasons beyond the franchisee’s control.

On balance, the benefits of a well developed franchising system far outweight any downsides. Call it what you will, marketing concept, HR strategy or distribution strategy, the vibrant franchising sector continues to drive significant business growth around the world.

You can contact John Di Natale, Senior Consultant at DC Strategy, a Australian specialist consulting and law firm.

[Editor’s Note: I came across “The Franchise Guide 2011″, and as I flicked through I read this section in particular which was a great summary. So I asked the author, John Di Natale, for permission to republish it here.

If you are have shown the entrepreneurial spirit by coming to CarefulCash.com, then you should also be checking out Franchising.

Step through John’s details and compare to your other options.

Believe it or not, franchising was once regarded as a barely legal business model. Now it has become well accepted.

If you want to start a small business, you may find a franchise less risky. If you want to learn marketing and how to run a business, you may do better starting with an ‘apprenticeship’ inside a proven franchise model first. If you are considering network marketing and MLM, and you have the available capital and more time available, then a franchise may be an even better step up for you.

What ever your choice, make sure you treat your business seriously and get proper training from the start. -Dr Martin Russell.]

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