Positives and Negatives of Owning a Franchise
The technique of utilizing another company's successful business model is known as franchising. For the franchisee, a franchise provides an alternative to creating "chain stores" to distribute goods, which avoids the investments and liabilities associated with a chain.
There are three types of franchises: business model, product, and manufacturing, each of which runs differently. However, the discussion will center on the benefits and drawbacks of owning a franchise. There are both pros and cons to franchising for both franchisees and franchisors.
Franchising is based on a marketing concept that can be advocated by a corporate entity as a method of expansion. When used, a franchise owner (franchisor) licenses part or all of his or her skills, business model, intellectual property (IP), and rights to trade his or her branded products and services to a franchise buyer (franchisee). In exchange, the franchisee pays fees and commits to specific commitments, which are usually specified in an agreement.
The benefits of having a franchise as a Franchisor are as follows:
Building a franchise allows for organic expansion with no financing. The firm expands as funding is obtained from franchisees through fees rather than loans.
Growth that is efficient
Opening many branches can be a challenging job that is both financially and time-consuming. Franchising can help by distributing the responsibility to another business owner. The process grows more efficient, relieving the initial business owner of obligation.
Enhanced brand awareness
Furthermore, franchising helps to raise brand exposure. Because the brand's footprint has grown, more individuals are becoming aware of it. This increased brand recognition of a franchise with more stores can be extremely beneficial to both the franchisor and the franchisees. McDonald's, for example, is now renowned all over the world since they began franchising their brand. While there are numerous advantages to opening a franchise for franchisors, there are also some negatives to consider.
These disadvantages include:
Complete loss of brand control
Even though a franchise agreement may include strict limits and instructions to influence the franchisee's decisions, franchising essentially involves giving away or selling some amount of control over a brand. Franchisees will not become carbon copies of their franchisors; instead, they will think and act differently.
Increased likelihood of legal disputes
The agreement between the franchisor and the franchisee is critical to the success of a franchise. There is always the potential of legal issues when there is a legally enforceable agreement. Although one may argue that a well-drafted franchise agreement will decrease the possibility of problems, these disagreements are nonetheless possible. These disagreements may wind up in an expensive court system.
To summarize, having a franchise has advantages and disadvantages, and when faced with the decision to establish a franchise business, one should ensure that they have examined the pros and disadvantages noted above, as well as some that have been left out.