Franchises may be a way for companies to expand and reach more customers while still maintaining direct control over the management of their facilities.
Franchising is “an arrangement whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating procedures.”
The term “franchisor” designates the individual who offers the franchise. It is the franchisee who buys the rights. Instead of beginning the firm from scratch, the franchisee gets the opportunity to build a business with a higher possibility of success.
Type of Franchising
Franchises are categorized based on a variety of criteria, including the amount of investment, the franchisor’s strategy, its operations, and marketing strategy, the type of relationship, and more.
Business Format Franchise
The franchisee who is a business entity is permitted to use the franchisor’s trademark; nevertheless, it is given access to all company operations and marketing materials. The franchisor offers a comprehensive process and strategy for every area of the business, as well as frequent and continuing training and support.
The most popular type of franchise system is a business franchise, which is the one that is usually mentioned when talking about franchising.
Franchised businesses come from more than 70 different industries. The most popular ones include fast food, retail, business services, fitness, and a number of others.
In this case, the franchisee grants the franchisee the right to produce and market its goods to a business using its brand name and trademark. The food and beverage industries are highly interested in this type of franchise.
Some producers provide merchants permission to promote their goods using the producer’s brand name and trademarks. Franchises are used by tire and automotive manufacturers to sell their goods.
In this style of franchising arrangement, producers control how retail shops promote their goods. Retailers receive rewards in the form of fees or product purchases.
An investment franchise is often a big firm that needs a lot of money upfront The franchisee is actually a significant investor who supplies the capital and management team, or who occasionally employs a franchisee of their own.
The main goal of this kind of franchising is to generate an ROI with minimal personal engagement and the potential for a monetary gain upon exit.
Business Opportunity Ventures
In business opportunity ventures, goods must be purchased and distributed by one company by an independent business owner.
The business gives the owner of the business accounts or clients, and in return, the owner is expected to pay the business a commission.
Through this kind of franchising agreement, business owners can gain distributorships and vending machine routes, for instance.
Advantages of Franchising—to the Franchisee
One of the key advantages of buying a franchise is that the owner avoids the risks associated with starting a brand-new business.
Typically, the franchisee comes to the company with a well-known name, brand, or service.
For instance, in the case of Subway, the franchisee will utilize the Subway name, which is well-known and often used throughout the whole United States.
The franchisee is not expected to make the effort to build the company’s reputation. That credibility already exists based on the years the franchise has existed.
Additionally, Subway has spent millions of dollars on advertising to promote its products and services. Potential consumers will not know who is opening the sandwich shop, therefore it will take a lot of work and money to develop a reputation and confidence in the community.
The managerial assistance that the franchisor offers is another perk for the franchisee.
Each franchisee must successfully finish a rigorous training program that covers every area of operating the business.
Classes in production, marketing, bookkeeping, and human management may be part of the training.McDonald’s is one illustration. All McDonald’s franchisees are required to attend its school, where they all take lessons in these subjects.
Additionally, for in-field training, some franchise owners demand that their new franchisees work alongside an existing franchise owner or at a shop or facility that is controlled by the firm.
Most franchisors provide managers with help as needed once the franchise has been established.
Franchisees can call a toll-free hotline at any time with queries. Larger franchise local offices frequently travel to nearby franchisees to offer assistance and inform owners of new developments.
Starting a new business may be time- and money-consuming. Franchises give business owners the ability to launch a company with upfront support, which may help them save time and possibly money.
Some franchisors carry out market research and site evaluations in the area, which may involve examining the competitors, demographics, business, traffic, and environmental factors.
In some circumstances, the franchisor could additionally offer financing for the start-up cost of the franchise.
The initial investment required to purchase a franchise generally consists of a fee for franchisees, building costs, and equipment purchases. The franchise’s start-up costs may differ based on location, size, and other factors.
Knowledge of the Market
An experienced franchise business provides the owner with years of business expertise and a thorough insight into the industry.
This is often stated in a written plan that is given to the franchisee and describes the profile of the potential client as well as the tactics that must be used after the franchise has started. Due to market variances on a local and regional level, this is particularly crucial.
From one location to the next, there might be significant differences in the degree of competition, the potency of media, and preferences. They can provide advice and aid in adapting to the numerous variations due to their years of expertise.
Operating and Structural Controls
The maintenance of the quality of their goods and services and the implementation of efficient management controls are two difficulties that entrepreneurs encounter when they launch a new company.
The franchisor will locate suppliers that adhere to the agreed standards of quality, particularly in the food business. The products may occasionally be supplied by a franchisee.
Standardization of the supplies and the goods and services provided makes it easier for the franchisee to maintain the crucially important high standards. Standardization can also assist in upholding the constant brand image that franchise firms rely on for expansion.
Administrative controls often involve personnel choices, such as those related to hiring or firing schedules and training to ensure consistency in customer service, as well as financial decisions relating to expenses, inventories, and cash flow.
Following the conclusion of the franchise deal, a handbook is normally given to the franchisee and contains a description of the controls.
Advantages of Franchising—to the Franchisor
The benefits that a franchisor enjoys from franchising are related to expansion risk, capital needs, as well as the cost advantages that result from the enormous purchasing power.
Consider what happened with Subway. Without franchising, it is clear that Fred DeLuca would not have been able to grow his company to the extent it is now. The franchisor must be able to provide value and credibility that others are willing to buy in order to use franchising as an expansion strategy.
For an entrepreneur, one of the most obvious benefits of franchising a firm is that it enables the business to grow quickly without requiring a significant capital investment.
When we consider the difficulties and barriers entrepreneurs encounter when attempting to manage and build a new firm, this is a big advantage.
By awarding and selling franchises in certain locations, a franchisor may expand a company’s reach both domestically and beyond.
Compared to what it may be without franchising, far less money is needed to sustain this expansion. Consider the amount of money DeLuca will need to build the 8,300 Subway sandwich shops.
The franchisor has the capacity to make huge purchases, achieving economies of scale that would not be achievable otherwise.
Numerous franchises create large amounts of raw materials, accessories, and packaging pieces before selling them to other franchisees. Franchisees frequently pay less for certain goods since they are required to purchase them as part of their franchise agreement.
The ability to spend more money on advertising is one of the main advantages of franchising your business.
Disadvantages of Franchising
Franchising isn’t always the best choice for business owners. Anyone thinking about investing in a franchise opportunity should thoroughly investigate the prospects.
The government, industry players, and regulatory agencies have recently started paying greater attention to the frequent conflicts that arise between the franchisor and the franchisee.
You’ll have to pay additional regular fees that are unique to franchises in addition to the initial financial commitment you’ll need to make to start the franchise business.
The continuing costs of the franchise must be outlined in the franchise agreement. This may include royalties, marketing costs, or even a cost for training services.
Lack of Financial Privacy
Lack of privacy is another issue with franchising. The franchisor will generally be required to monitor the whole financial system of the business, according to the franchise agreement.
Franchisees frequently regard the absence of financial privacy as a disadvantage of owning a business. However, if you feel at ease receiving financial guidance, the issue can be less severe.
Loss of Control
The drawback of being in charge of the franchisee’s daily operations is that you have no influence on the franchise company’s daily business activities.
Your procedures and processes must be thoroughly documented, and your franchise agreements must be adequate to ensure that the franchisee complies. Franchisees and staff members must also receive sufficient training.
You will be obliged to make continuing royalties as a franchisee. The gross sales, not your earnings, are often the basis for these royalties.
This implies that royalties may have an impact on your profit margin. Make sure that the franchise potential and benefits of the franchise system outweigh your acquisition costs.
Limited Creative Opportunities
You’ll benefit from the creative freedom when you start your own business that isn’t possible when you buy an existing franchise.
Since it is possible that you will have to go by the company’s laws and regulations, developing a distinctive marketing plan or an original logo isn’t available in this kind of industry.