Advantages And Disadvantages Of Franchising Pdf
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Rather than carrying out a company formation to start a new limited company, people often buy into an established franchise to get started in business. But what are the advantages and disadvantages of a franchise? As a business structure, a franchise can certainly be an appealing option.
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Buying a franchise can be a viable alternative to starting your own business. Listed below are some advantages and disadvantages of buying a franchise.
Franchising is based on a marketing concept which can be adopted by an organization as a strategy for business expansion. Where implemented, a franchisor licenses its know-how, procedures, intellectual property , use of its business model , brand, and rights to sell its branded products and services to a franchisee. In return the franchisee pays certain fees and agrees to comply with certain obligations, typically set out in a Franchise Agreement.
The word "franchise" is of Anglo-French derivation—from franc , meaning free—and is used both as a noun and as a transitive verb. Adopting a franchise system business growth strategy for the sale and distribution of goods and services minimizes the franchisor's capital investment and liability risk.
Franchising is not an equal partnership, especially due to the legal advantages the franchisor has over the franchisee. But under specific circumstances like transparency, favourable legal conditions, financial means and proper market research, franchising can be a vehicle of success for both franchisor and franchisee. Thirty-six countries have laws that explicitly regulate franchising, with the majority of all other countries having laws which have a direct or indirect effect on franchising.
The boom in franchising did not take place until after World War II. Nevertheless, the rudiments of modern franchising date back to the Middle Ages when landowners made franchise-like agreements with tax collectors, who retained a percentage of the money they collected and turned the rest over.
There was little growth in franchising, though, until the midth century, when it appeared in the United States for the first time. One of the first successful American franchising operations was started by an enterprising druggist named John S.
In , he concocted a beverage comprising sugar, molasses, spices, and cocaine. Pemberton licensed selected people to bottle and sell the drink, which was an early version of what is now known as Coca-Cola.
His was one of the earliest—and most successful—franchising operations in the United States. The Singer Company implemented a franchising plan in the s to distribute its sewing machines. The operation failed, though, because the company did not earn much money even though the machines sold well.
The dealers, who had exclusive rights to their territories, absorbed most of the profits because of deep discounts. Some failed to push Singer products, so competitors were able to outsell the company. Under the existing contract, Singer could neither withdraw rights granted to franchisees nor send in its own salaried representatives.
So, the company started repurchasing the rights it had sold. The experiment proved to be a failure. That may have been one of the first times a franchisor failed, but it was by no means the last.
Still, the Singer venture did not put an end to franchising. Other companies tried franchising in one form or another after the Singer experience.
For example, several decades later, General Motors Corporation established a somewhat successful franchising operation in order to raise capital. Perhaps the father of modern franchising, though, is Louis K. In , Liggett invited a group of druggists to join a "drug cooperative. His idea was to market private label products. Sales soared, and Rexall became a franchisor. The chain's success set a pattern for other franchisors to follow.
Although many business owners did affiliate with cooperative ventures of one type or another, there was little growth in franchising until the early 20th century, and in whatever form franchising existed, it looked nothing like what it is today.
As the United States shifted from an agricultural to an industrial economy, manufacturers licensed individuals to sell automobiles, trucks, gasoline, beverages, and a variety of other products. The franchisees did little more than selling the products, though.
The sharing of responsibility associated with contemporary franchising arrangement did not exist to a great extent. Consequently, franchising was not a growth industry in the United States.
It was not until the s and s that people began to take a close look at the attractiveness of franchising. The concept intrigued people with entrepreneurial spirit. However, there were serious pitfalls for investors, which almost ended the practice before it became truly popular. The United States is a leader in franchising, a position it has held since the s when it used the approach for fast-food restaurants, food inns and, slightly later, motels at the time of the Great Depression.
This amounts to 11 million jobs, and 4. Mid-sized franchises like restaurants, gasoline stations and trucking stations involve substantial investment and require all the attention of a businessperson. There are also large franchises like hotels, spas and hospitals, which are discussed further under technological alliances.
Three important payments are made to a franchisor: a a royalty for the trademark, b reimbursement for the training and advisory services given to the franchisee, and c a percentage of the individual business unit's sales.
These three fees may be combined in a single 'management' fee. A fee for "disclosure" is separate and is always a "front-end fee". A franchise usually lasts for a fixed time period broken down into shorter periods, which each require renewal , and serves a specific territory or geographical area surrounding its location. One franchisee may manage several such locations.
Agreements typically last from five to thirty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees. A franchise is merely a temporary business investment involving renting or leasing an opportunity, not the purchase of a business for the purpose of ownership. It is classified as a wasting asset due to the finite term of the license.
Franchise fees are on average 6. Although franchisor revenues and profit may be listed in a franchise disclosure document FDD , no laws require an estimate of franchisee profitability, which depends on how intensively the franchisee "works" the franchise. Therefore, franchisor fees are typically based on "gross revenue from sales" and not on profits realized. See remuneration. Various tangibles and intangibles such as national or international advertising , training and other support services are commonly made available by the franchisor.
Franchise brokers help franchisors find appropriate franchisees. Franchising is one of the few means available to access venture capital without the need to give up control of the operation of the chain and build a distribution system for servicing it. After the brand and formula are carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their franchisees while reducing their own risk.
There is also risk for the people buying the franchises. However, failure rates are much lower for franchise businesses than independent business startups. Franchisor rules imposed by the franchising authority are becoming increasingly strict. Some franchisors are using minor rule violations to terminate contracts and seize the franchise without any reimbursement.
Franchising brings with it several advantages and disadvantages for firms looking to expand into new areas and foreign markets. The primary advantage is that the firm does not have to bear the development cost and risks of opening a foreign market on its own, as the franchisee is typically responsible for those costs and risks, putting the onus on them to build a profitable operation as quickly as possible.
A primary disadvantage to franchising is quality control, as the franchisor wants the firm's brand name to convey a message to consumers about the quality and consistency of the firm's product. Distance can make it difficult for firms to detect whether or not the franchises are of poor quality. This creates a smaller number of franchisees to oversee, which will reduce the quality control challenges.
Each party to a franchise has several interests to protect. The franchisor is involved in securing protection for the trademark, controlling the business concept and securing know-how. The franchisee is obligated to carry out the services for which the trademark has been made prominent or famous.
There is a great deal of standardization required. The place of service has to bear the franchisor's signs, logos and trademark in a prominent place. The uniforms worn by the staff of the franchisee have to be of a particular design and color.
The service has to be in accordance with the pattern followed by the franchisor in the successful franchise operations. Thus, franchisees are not in full control of the business, as they would be in retailing. A service can be successful if equipment and supplies are purchased at a fair price from the franchisor or sources recommended by the franchisor.
A coffee brew, for example, can be readily identified by the trademark if its raw materials come from a particular supplier. If the franchisor requires purchase from her stores, it may come under anti-trust legislation or equivalent laws of other countries.
The franchisee must carefully negotiate the license and must develop a marketing or business plan with the franchisor. The fees must be fully disclosed and there should not be any hidden fees.
The start-up costs and working capital must be known before the license is granted. There must be assurance that additional licensees will not crowd the "territory" if the franchise is worked according to plan. The franchisee must be seen as an independent merchant. It must be protected by the franchisor from any trademark infringement by third parties. A franchise attorney is required to assist the franchisee during negotiations.
Often the training period — the costs of which are in great part covered by the initial fee — is too short in cases where it is necessary to operate complicated equipment, and the franchisee has to learn on their own from instruction manuals. The training period must be adequate, but in low-cost franchises it may be considered expensive. Many franchisors have set up corporate universities to train staff online.
This is in addition to providing literature, sales documents and email access. Also, franchise agreements carry no guarantees or warranties and the franchisee has little or no recourse to legal intervention in the event of a dispute. Contracts are renewable at the sole option of the franchisor. Most franchisors require franchisees to sign agreements that mandate where and under what law any dispute would be litigated.
Franchise contracts also influence the development of trust between partners. Scholars in economics and management have noted how differences in the framing of contractual obligations promotion-framed vs.
In Australia, franchising is regulated by the Franchising Code of Conduct, a mandatory code of conduct concluded under the Trade Practices Act The code also regulates the content of franchise agreements, for example in relation to marketing funds, a cooling-off period , termination, and the resolution of disputes by mediation. The new Code applies to conduct on or after 1 January These are significant changes and it is important that franchisors, franchisees and potential franchises understand their rights and responsibilities under the Code.
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Motivated and Effective Management. The local management of each franchised unit will be highly motivated and very effective. They treat the franchise units as their own and that will usually lead to higher sales and profit levels. Fewer Employees. Speed of Growth.
The fact of the rapid spread and rapid development of franchising is, firstly, to mutual benefit for both the franchisor and the franchisee and, secondly, to reduce the.
Buying a franchise can be a quick way to set up your own business without starting from scratch. There are many benefits of franchising but there are also a number of drawbacks to consider. Read more advantages of franchising. Read more disadvantages of franchising.
advantages and disadvantages of franchising pdf
Franchising is a well-known business strategy. Franchising is a form of contractual agreement in which a franchisee a retailer enters into an agreement with a franchisor a producer to sell the goods and services for a specified fee or commission. The retailer through his outlet distributes the goods or services. Franchising — Meaning, Advantages, Disadvantages.
For these businesses, franchising can be a better alternative because the franchises are set up in locations near to the people that are demanding their products or services. However, according to Carlos Garcia, the franchisor of Total Clean, franchising is not an easy way to grow your business. The table below shows more advantages and disadvantages of franchising for the franchisor:.
Businesses expand by franchising as way of accessing external capital to fund the growth of new stores or outlets that are operated by committed and profit-driven franchisees that are likely to be more diligent and focused than employed staff. Franchisees are attracted to franchising for the prospect to become their own boss without re-inventing the wheel. The old adage in business for yourself, but not by yourself accurately describes this motivation. Below is a summary table of advantages and disadvantages of becoming a franchisee. A more detailed explanation of each item is listed at the end of the table. Asia-Pacific Centre for Franchising Excellence 1 www.
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