Advantages and disadvantages to the parties involved in the business of Franchising.

These days franchising business has also been in more trends ........ actually thefact behind it is .....it requires less investment, experience, and also ...... success is proven when compared to start-ups .....there are certain reasons behind these things that is they provide you training to run their business model ...need not to spend on advertising because Franchisor already does that ......there are other factors also ....which are in support of franchising but everything has their own advantages and disadvantages......that to from the point of view of Franchisor and Franchisee...!!!!

Let's see their advantages and disadvantages with respect to parties involved in franchise...!!

 

Franchising:

Definition: A continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration. Franchising is a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers (franchisees).

                  In finer terms, franchising is an arrangement, in which the manufacturer, permits another firm, the right to use its diverse intellectual property rights such as trademark, brand name, technical know-how, designs, etc., in addition to the proven name, goodwill and marketing strategies, for a certain sum. E.g. Mc Donald’s, Subway, & Eleven, Domino’s, Dunkin’ Donuts, etc.

Advantages to Franchisor:

Franchising business model.

Now let’s look at franchising from the franchisor’s perspective. First, we will consider thepositive aspects:

smaller capital investment

required than if outlets were formed independently, multiple sources of capital coming into the business, expansion of the business happening much faster than if the franchisor were in business alone, synergy created by a group of motivated franchisees, and volume discounts for bulk purchasing.

Expansion with Smaller Capital Investment 

From the perspective of the franchisor, the biggest advantage of offering franchises is the expansion of its distribution sources with limited equity investments. The franchise fees from franchisees provide capital to the franchisor.

 The franchisor therefore does not have to borrow from lenders or attract outside investors. For a business with limited capital, franchising, in which franchisees share the financial burden, may be the only viable way to expand.

Multiple  Sources of Revenue

Franchisors often build several sources of revenue into their franchise agreements. These sources might include the franchise fee, which is paid when the agreement is signed; a percentage of the franchise’s monthly gross operating revenues; and revenue from selling the necessary products and supplies to the franchisees.

 For example, a fast-food restaurant franchisee could have a franchise fee of up to $200,000; pay 3 to 8 percent of monthly gross sales as a royalty fee; and be required to purchase all food items (from hamburger to condiments), office supplies, and restaurant supplies (napkins, coffee filters, and paper cups) from the franchisor.

Controlled Expansion 

When compared with the expansion of a corporate chain, expanding via franchising can be accomplished with a simpler management structure.

Very rapid growth of a corporation can be more of a problem than an opportunity, however, if the growth outpaces central management’s capacity to control and monitor it. 

When  this happens, problems with inconsistency, communications, and especially cash flow  generally appear. Although franchisors still face these problems to some degree,the franchise network reduces them.

Motivated Franchisees Because franchisees own their own business, they are almost always more highly motivated to make it succeed than an employee working for someone else. 

Franchisees have a direct personal interest in the entire operation, so they are inspired to perform and thus create positive synergy within the franchise.Bulk Purchasing Centralized purchasing of products and supplies allows franchisors to take advantage of volume discounts, because they are buying for all the franchise locations. 

This economy of scale can increase profit margins and hold down costs for franchisees.

you can also see:

A great start up of Mahashay Chunni Lal Gulati .......which turned out MDH masala company a brand of spices , marketing mix of MDH

Marketing mix of Marriott international.......!!

Tiktok a platform for influencer marketing.....!!

BPO AS AN OPTION??BPO .....to bpo or not to bpo is an obvious question

Disadvantages to Franchisor:

Problems exist in every method of business operation, and franchising is no exception.

Loss of control

over the business is the biggest disadvantage faced by franchisors. Other potential problems relate to profit sharing and disputes with franchisees.Loss of Control Franchisees who do not maintain their businesses reflect poorly not only on other franchisees, but also on the franchisor. 

Although the franchisor does control the organization to the limit specified by the franchise agreement, franchisees are still inde�pendent businesspeople. After the franchise agreement has been signed, the franchisor must get permission from franchisees before any products or services are changed, added, or eliminated. 

Permission is often negotiated individually. This system makes it difficult for the franchisor to adapt products to meet changing customer needs, especially if a wide variety of consumer tastes are being served over a large geographic area.

One way franchisors have dealt with this problem is by establishing some company owned units. Because these sites are not independently owned businesses, the franchisor can test-market new products, services, and procedures in them.

 In this way, the franchisor can track and respond to changing customer needs, as well as use these units as examples when negotiating with franchisees.

Profit Sharing 

If franchisees are able to recover their initial investment within two or three years, they could enjoy a 30 to 50 percent return on investment. This return can provide motivation for the franchisees, but it represents profit that the franchisor is not making with a company-owned unit.

Franchisee Disputes 

Friction between franchisees and franchisors may arise over such issues as payment of fees, expansion, and hours of operation. These potential conflicts point to the importance of good communication between both sides and the need to have a clearly written franchise agreement.

Advantages to Franchisee

Types of Franchising

For the franchisee, there are eight major advantages of franchising:
 product or service, marketing expertise, financial assistance, technical and managerial assistance, an opportunity to learn the business through professional guidance, quality control standards, efficiency, and opportunity for growth.

Proven Product

The most valuable advantage to a franchisee is that you are selling a proven product or service. Customers are aware of the product; they know the name, and they know what to expect. 

For example, travelers may not know anything about the Ramada Inn in Colorado Springs, but they know Ramada’s reputation and are more likely to stay there than at some independent, unknown motel.Marketing Expertise Franchisors spend millions of dollars on national or regional advertising to help build an image that independent businesses could not afford.

 Franchisors also develop print, broadcast, and point-of-purchase advertising. Local franchisees do share in these advertising costs, usually based on their gross revenues, but it is still a great advantage to have access to the marketing expertise of the franchisor at relatively low cost.

Financial Assistance Some franchisors provide financial assistance to new franchisees.This assistance typically comes in the form of trade credit on inventory or overhead reduction by the franchisor’s choosing, purchasing, and owning buildings and real estate.

Professional Guidance 

A franchise can provide a source of managerial and technical assistance not available to an independent business. You can benefit from the accumulated years of experience and knowledge of the franchisor.

 Most franchisors provide training, both as preparation for running the business and as instruction after the business gets off the ground. This training can allow a person without prior experience tobe successfulin owningafranchise. 

A good franchisor is available to provide day-to-day assistance and professional guidance should a crisis arise. In addition, franchisees can receive a great deal of technical help regarding storelayout and design,location, purchasing, and equipment.

Opportunity to Learn 

Although it is not usually advisable to go into a business in an un�familiar field, franchising can provide an opportunity to become successful doing exactly that.

 Thus, franchising can be helpful for a midcareer change of direction. In fact, some franchisors prefer their franchisees not to have experience in that particular field. They prefer to train their business owners from scratch so there are no bad habits to break.

Recognized Standards

Franchisors impose quality standards for franchisees to follow, a feature that might not seem advantageous at first glance—if independence is your motive for self-employment, why would you want to meet standards set by someone else? The benefit, though, is that the practice ensures consistency to customers.

 Consumers can walk into a McDonald’s anywhere in the world and know what to expect. A franchisor’s quality control regulations help franchisees to maintain high standards of cleanliness,service, and productivity. As a franchisee, you will benefit from standardized quality control, because if another franchisee in your organization provides inferior service, it wil affect attitudes toward your business.

Efficiency Because of increased efficiency, a franchise can sometimes be started and operated with less capital than it takes to start an independent business. Franchisors have already been through the learning curve and worked most of the bugs out of the process.

 Inventory needs, such as what to stock and what will sell quickly, are known before you open the doors, so you won’t waste money on equipment, inventory, or supplies that you don’t need. Many franchisors often provide financial resources for start-up and working capital for inventory.

Potential for Business Growth 

If you are successful with a franchise, you will often have the opportunity to multiply that success by expanding to other franchises in other locations.

 Most franchisors have provisions to open other territories.These eight advantages share a common theme—the opportunity to benefit from someone else’s experience. In other words, as a franchisee, you have the chance to learn from someone else’s mistakes.

Disadvantages to  Franchisee

Of course franchising has its drawbacks, too. You must give up some control, some decision-making power, and some freedom. Other disadvantages to the franchisee include fees, problems caused by overdependence on the franchisor or by not receiving what was expected from the franchisor, the possibility of fraud or misunderstanding, termination of the agreement, and the potentially negative effect of poor performance of other franchisees.

Cost of Franchise 

The services, assistance, and assurance in buying a franchise come at a price. Every franchisor will charge a fee and/or a specified percentage of sales revenue. The disadvantage to the franchisees is that they are usually required to raise most of the capital before they begin operations. The total investment can range from $500 for a windshield repair franchise to $45 million for a Hilton Inn.
                              

                     These  fees and percentages may begin to seem excessive after you have been in business for a while and see how they affect your bottom line. It is not uncommon for franchisees to be grateful for the assistance that a franchisor provides in starting the business,only to become frustrated by the royalties that have to be paid a few years later.

Restrictions  on Freedom or Creativity 

The restrictions placed on their freedom may be a problem for some franchisees. Most people open their own businesses because they have a desire for independence, but franchises have policies and procedures that must be followed to maintain the franchise agreement.

 Also, the size of your market will be limited by territorial restrictions. And although you may feel that some products, promotions, or policies are not appropriate for your area, you will have little recourse after the franchise agreement has been signed.

Overdependence or Unsatisfied Expectations

Even though a franchisee is bound by contractual agreement, overdependence on the franchisor can still pose a problem. Franchisors do not always know what is best for every set of local conditions.

 The franchisee must be willing and able to apply his or her own managerial decisions in running the business in the way best suited to the local market and avoid being overly dependent on the franchisor’s guidance. The flip side of overdependence is dealing with a franchisor that does not provide all the assistance that the franchisee expected.

Risk of Fraud or Misunderstanding 

Less-than-scrupulous franchisors have been known to mislead potential franchisees by making promises that are not fulfilled. 

To avoid being taken in by a fraudulent franchise, consult an attorney and talk with as many current franchisees as possible. 

Do not think that because the agreement looks standard it is unnecessary for you to understand every section. Look especially at the fine print.

Problem of Termination or Transfer Difficulty in terminating the franchise agreement or having it terminated against your will can be a disadvantage to the franchisee. Before entering into the franchise, you should understand the section of the agreement that describes how you can get out of the deal. 

For instance, what if you want to transfer your rights to a family member, or sell the franchise to someone else, or otherwise terminate your agreement? What provisions does the contract make for you to renew the agreement?Most franchise agreements cover a specific period of time—typically 5–20 years. Some may be renewed in perpetuity if both parties agree. 

Otherwise, both sides must consider franchise renewal when the term of the agreement expires. Check the agreement to see whether the franchisee has a right of first refusal, which means that the franchisee must decline to continue the agreement before the franchisor can offer the franchise to someone else. 

Check whether the franchisor must provide just cause for termination or must give a definite reason why the agreement is not being continued. Remember that a franchise is a contract. Any questions regarding it should be directed to your legal counsel.


Poor Performance of Other Franchisees 

Poor performance on the part of other franchisees can lead to problems for you. If the franchisor tolerates substandard performance, a few franchisees can seriously affect the sales of many others.

 Customers view franchises as an entire unit, because the implicit message from franchises is that “we are all alike”—for good or ill. If customers are treated unsatisfactorily in one location, they are likely to believe the same treatment will occur elsewhere.


which advantage you liked about franchising and what are your view points on it do let me know in the comment section below.also  share my post....and do subscribe my newsletter to get newsletter to your inbox.