In a franchise business, an individual gets into contact with a business owner with a trade mark or trade name. For franchises to succeed, there has to be a level of mutual trust between the franchisee and franchisor. The franchisee injects an entrepreneunal spirit into the business that enables it to be a success. A new person in business wishes to use the known trade identity of the franchisor to conduct his business. He wants to reap the advantages of selling a product with recognition and great customer goodwill in the market place.
Through franchising, the franchisee seeks to reduce the investment risk by associating with an established company. The franchisor owns the trademark or trade name and sells the right to use the identity to the franchisee. This payment is known as a franchise fee. The two people have to enter into a business contract. The contract governs the way both parties will conduct their business operations. The franchise model has been highly successful. The franchising model has been very popular and has spread at a high rate. American companies have been able to spread abroad in other countries such as Canada (Sharp, n,d).
Businesses that are not franchises usually fail within the first year. In a franchise model however, the business owner assists the new business owner with management, financial and marketing expertise. There are three main types of franchises:
a) Manufacturing franchising: The franchisee is allowed to produce and sell goods under the franchisor product name or trademark. This method is usually used in soft drink franchises.
b) Business format franchising: The franchisors provide several services to the franchisee such as training, product supply, site selection and even marketing plans. This involves a broader relationship between the two parties.
c) Product franchising: The manufacturing company gives the franchisee the right to sell and distribute their products using the known brand name and trademark.
Advantages of franchising
There are several advantages of franchising. The franchisee is opening a business based on products and ideas that have already been proven and tried. The products and services have already had high success levels in the market. There are less costs since the franchisee does not spend money creating brand awareness as the brand is well known. The franchisee just researches on how successful other franchisees are before committing himself in the business.
Every time the franchisor advertises his product the franchisee gains by the adverts and the promotional campaigns selling more products than before. The franchisee is given support by the franchisor in terms of training, finances, marketing and promotional advise, setting up the business and advice even as the business continues. Getting finances for the business is easier as financial institutions are more willing to lend money to a business with success in the market with a known and successful brand name with a great reputation.
The franchisee is given a certain territory to operate his business. The franchisor will not open other franchisee businesses in the area. It can be said that the franchisee has exclusive rights in their territory (Sifleet, 2005). The franchisor already has relationships with the suppliers of the goods therefore the franchisee reaps the benefits of the already established network of suppliers. The franchisee also benefits from communication and sharing ideas and receiving support from other franchisees in the network. The franchisee has an ownership mentality especially where the franchise agreement is long term. The person is more likely to devote time, capital to the growth of the business. The person will not walk away when there are business challenges. The franchisee system is able to pool resources together since the franchisees are required to contribute to a national marketing fund.
This produces competitive advantages and helps them maintain market share in the face of challenges. There is great control of the businesses at the retail level since the franchising contract provides a legal and institutional structure that provides detailed control of the individual business marketing and operational programs. In business partnerships there is a constant risk in legal exposure in terms of non-compliance, damages and attorney fees. By someone operating a franchise the risk in legal exposure is eliminated as long as the franchisee complies to the franchise agreement. The franchising model has a superior market image as compared to other distributorship models since there is uniformity to operational compliance, marketing methodology and retail presentation.
There is team participation with the franchisees more open to contributing ideas to help the business. They may also alert the franchisor on the franchisees that do not comply to the operational guidelines of the business.
Disadvantages of Franchising
There are high legal expenses involved in opening a franchise. There are agreements that have to be prepared such as the Uniform Franchise Offering Circulars (UFOCs). The documents may have to be filed in several states. However the yearly expenses are less than the initial costs of setting up the business and the required documentation. The laws of franchising are very technical. There are certain disclosures that a franchisor has to make. Without such a disclosure the franchisee has an automatic recession right. Due to the technicality, there has to be adequate training given to the two parties by a legal or compliance personnel. There are control issues as the franchisor has a lot of influence over the franchisee business.
Additionally, the franchisee faces marketing constraints since the advertisements and their brochures must be pre-cleared by the state agencies before use. Furthermore any financial results information can only be presented formally to the UFOC. No earnings claim can be disclosed in the adverts. There are also challenges in business relationship between the franchisee and the franchisor. The franchisee may see themselves as being in a partnership with the franchisor. The franchisor on the other hand wisely knows that there needs to be leadership in the partnership which has to be given by the franchisor. The relationship needs to be handled well as they talk of strategic direction and marketing plans.
The franchisee may have not have freedom to launch into other forms of distribution for example the internet or mail order or special sales venues to sell products. The franchisee may also desire to access different markets. There may also arise opportunities for mergers with existing competitive chains or co-branding opportunities. There are also legal problems that may arise. This can be handled well though by putting appropriate provisions in the franchise agreement and the franchisees receiving proper training. The franchisor has to find the right franchisee to deal with. The franchisee acts as a team player bringing entrepreneurial spirit into the franchise network. The relationship is long-term thus needs to be with the right kind of businessmen. Franchisors have been known to use psychological testing, training processes and detailed interviews in choosing the right candidates.
There is also the issue of rapid growth of the franchise that needs to be managed. With the success of the franchise the franchisor may face coordination and control challenges if the growth is not managed well. The franchisee relationship is highly regulated. In several states the ways in which a franchisor may terminate or refuse to renew a franchise is controlled. The franchisor can terminate the relationship however there are a lot of technical constraints.
Since the franchisees are required to pay royalties throughout the long-term contract they keep asking the franchisor what investment he has made. The franchisor therefore has to keep building value into the brand and providing great operational and marketing support so that the franchisee does not leave the business.
The franchisor may go out of business, get bankrupt or get negative publicity. This adversely affects the continuity of the franchise relationship and the business. The franchisee will have to stop the business. Other franchisees may give the franchise a bad reputation or a bad name. The conduct of one business affects the market sales and growth of another business. The franchisor has to ensure he uses a thorough recruitment process and reviews the conduct of the businesses continually. The franchisor has great control over the franchisee businesses. Although the franchisee has a selected territory to operate in he may be restricted in the changes he can introduce in the business to assist him to suit the business operations to the local market. The franchisee cannot sell the franchise business to just any one. He has to sell it to a franchisee that the franchisor approves of. It therefore takes more time to end the business relationship. All the profits of the business are shared with the franchisor.
There are costs that have to be paid continually by the franchisee such as continuous management service fees. There are also so many potential areas of conflict that have to be handled well by both parties such as profit levels, fees, territory allocation, monitoring and performance management(Hoy & Stanworth , 2003).
Many organizations are increasingly adopting the franchise model in order to achieve efficiency, and also gain competitive advantage. Franchising, when successfully implemented, helps create a brand that can traverse boundaries and position a firm in a strategic position. The type of franchise that companies is determined by several factors depending on the needs of the company and the costs benefit outcomes of the franchises. Therefore as firms strive to develop, it is imperative that they take advantage that comes with such models while putting in mind the inherent pitfalls in such ventures.
Hoy, F & Stanworth J. (2003) Franchising: an international perspective. London, UK:
Sharp, A(n,d). Franchising. Reference for Business. Retrieved from:
Sifleet, J. (2005). Franchises: Advantages and Disadvantages. EzineArticles. Retrieved from: