Through franchising, a business can achieve several benefits such as the expansion of the business territory. As is the case with any modern business, franchising has its own advantages and disadvantages. Several companies enjoy huge profits through franchising their products worldwide.
The first advantage of franchising your business abroad is that the business will spread to new markets. This is because new customers will have access to the company’s products. This is possible even if the franchisor lacks the funds to expand to the new markets. The franchisee meets this end of business by paying the fees and any other start-up costs required.
The second advantage is that the company makes more income. Through payment for branded merchandise by the franchisee, and the remission of a regular fee to the franchisor for the trademarks and names that they use, the company can make extra revenue and improve the company’s cash flow statements.
The third advantage of franchising is that the franchisee will meet the costly burden of starting a new business. This is because the franchisor need not take financial obligations; all that is there to do is to sell the franchise license. Furthermore, the franchisee will be responsible for all the costs incurred, for example, the franchisee will pay their employees. In addition to this, all cost including operation, distribution and advertisement are the responsibility of the franchisee.
There are several disadvantages associated with franchising your business. Foremost, you, the franchisor, do not have control over the way the franchisee manages the business. The franchisor stipulates the rules to be followed at outset of the franchise agreement. However, the franchisor does not manage the business. The franchisee has the volition to run the business as they deem fit as long as they do not contravene the contractual terms.
The second disadvantage is the risk of failure. The innate nature of a business and the business structure may not fit properly in the franchising kind of business. Even the business suited for franchise may fail. This is because the business wholly depends on the response of the market. Should the franchises fail, this could shake the heart of the business.
Lastly, the other disadvantage is the amount of time involved in the selection of the individual who will implement the business in the franchise. Even after the franchisee has been found, the franchisor has the role of guiding and supporting the franchisee. These two tasks of selecting and supporting the selected franchisee can consume a lot of time.
Relationship between risk management and franchising when developing a retail business internationally
While franchising allows a business to enjoy expansion in terms exploitation of economies of scale, it is important to recognise the risk factors that accompany the franchise business. In the case of retail businesses, in practice, retail stores are distributed in selected regions in the target market. In the analysis of risk, it can be seen that the cost of running one store may be higher than running a chain of them locally. Risk bares its teeth on a franchise as different locations provide expectations for different risk attributes returns as compared to others. It is the choice of the franchisor on where to take their business. There are two possible approaches, cases of risk aversion or adoption of risk neutrality. In the case of risk aversion, this is the case where the franchisor takes a humongous risk by venturing into a highly risky territory. On the other hand, in the adoption of risk neutrality, the franchisor could choose to adopt a neutral standpoint. This is because the principle takes into account the fact that the cost of monitoring a business increases as the risk increases. The volume of sales also plays a crucial role in the determination of the extent of risk to be taken. Locations with higher risks have higher monitoring costs than those with fewer sales. Finally, it is up to the franchisor to devise suitable ways of shifting the risks to the franchisees. This, however, will be capped by the risk aversion of the franchisee.
Bardsley, Nick. Franchising. Hampton, Middlesex [England: Key Note Publications, 2000. Print.