Advantages And Disadvantages Of Franchising

As with any business model, franchising has both its pros and cons. Perhaps one of the most effective ways to determine whether franchising is a good fit, whether as a prospective franchisor or franchisee, is to evaluate themselves and determine whether the potential benefits outweigh the potential problems.

Related: Franchise FAQ - A Basic Guide

For The Franchisor

Advantages

1. Improved cash flow from additional sources of income through initial and ongoing franchise payments.
2. Lower capital outlay and risk for growth of additional business units as development costs will be funded by franchisees.
3. Improved economies of scale from higher purchasing power.
4. Lower advertising and marketing costs as expenses are shared among a larger group.
5. Generation of motivated managers (franchisees) who will self-incentivize towards business success.
6. Able to experience faster franchise network expansion.
7. Able to maintain a smaller central organization compared to developing and owning units managed by a corporate team.

Disadvantages

1. Considerable capital and resource allocation are necessary to develop and integrate a pilot operation to support the franchise system.
2. Less control over managers (franchisees) than dealing with the franchisor's employees.
3. Franchisees may not necessarily have the same goals and objectives as the franchisor or brand owner.
4. Risk of accepting errant franchisees whose actions may negatively impact all units under the same brand name.
5. Required to disclose confidential information to franchisees may become a risk to the brand owner.
6. Franchisees may pressure the franchisor to have their suggested policies or procedures implemented.

For The Franchisee

Advantages

1. Able to operate a proven franchise model of a successful business.
2. Access to proven operating systems and procedures.
3. Avoiding the "trial and error" period in starting a new business as the franchisor will impart the necessary knowledge and skills.
4. Assistance with initial franchise unit setup, training, and ongoing operational and management support.
5. Association with a well-established brand and its products and services with a ready pool of loyal customers.
6. Access to bulk purchasing and supply systems.
7. Able to leverage the franchisor's more considerable resources while starting a small business.
8. Able to focus on generating sales revenue and business planning for the franchisor.

Disadvantages

1. Higher initial investment outlay due to franchise-related fees.
2. The franchisor's standard protocols, policies and guidelines restrict less autonomy in business direction and innovation.
3. Lower profits due to royalties and other ongoing payments to the franchisor.
4. The limited territory where the franchisee may operate or promote the business.
5. The length of the term of the franchise agreement is limited, and the franchisor is not obligated to offer renewal terms upon expiration.
6. Less autonomy for the sale of the business as the franchise agreement will dictate certain conditions, typically obtaining the franchisor's agreement.

Franchisor Vs Franchisee: The Different Perspectives

For business owners, franchising offers the opportunity to grow the business at a faster rate when compared to developing their business units. However, franchising, if not performed and executed correctly, could also damage the business name. Therefore, the ability to appoint competent and trustworthy franchisees is crucial to developing and maintaining a successful franchise system. Independent business owners looking to expand with franchising must know what to expect and understand that while they may not have the same amount of control as managing their employees, having the right franchisees could help to ease the load of growing the business.

For people looking to acquire a franchise, owning a franchise business allows them to grow as business owners with experienced assistance and advice readily available. But franchisees must have their business operations by explicit restrictions as directed by the franchisor. For people who value autonomy as a major reason for starting a business, this could represent a major obstacle in deciding whether to acquire a franchise business. Franchisees must be able to fulfil both the roles of a leader and a follower; lead their employees towards their own goals and objectives while following the franchisor's directions and protocols and executing accordingly.