Franchising: Characteristics, Advantages, Disadvantages

What is Franchising?

Franchising is the transfer of rights to sell a trademarked product or service through a system prescribed by a franchisor (seller of right) who owns the trademark. Franchising is a business arrangement in which the owner of a trademark, trade name, or copyright has licensed others to use it in selling goods or services.

It can be a sole proprietorship, partnership, or company form. Franchising also means expanding the business in the new market by transferring trademarks and goodwill to franchisees by charging fees.

In general, it can be said that a Franchise is a local representative of any organization that markets and conducts the entire marketing activity under complete guidelines and support of the franchisor in the area allotted to the franchisee. It is a kind of authorization granted to an individual or corporation by a franchisor to sell its goods or services in a defined way.


Characteristics of Franchising

These are the characteristics of franchising:

  1. Consistency
  2. Unique Offer
  3. Ease of Operation
  4. Reward Based on Margin on Sales
  5. Risk Aversion

Consistency

The franchised business must lend itself to replication i.e. consistent in providing goods and services similarly. It should offer the same goods or services in the same way by using the same financial, marketing, and accounting systems.

This is not a matter of each outlet being broadly similar to every other but it should be as near as possible in terms of identical offers made by them. It should use the same brand, logo, and image for all of its business outlets. Take McDonald for example, arguably the most public face of franchising, not just in this country, but across the world.

Unique Offer

Unique offer is the main heart of all franchise business and franchisor’s marketing efforts. It assumes an ideal, some special quality that marks out a product or service different from all the competition and the same cannot be imitated.

Such unique selling propositions must have a unique difference in relation to offers made by rivals. Often this difference is expressed in branding in terms of a bundle of qualities comprising name, logo, color, reputation, recognition, and reputation that is the unique property of one franchisor and not any other franchisor.

But behind the brand it delivers up to customer expectation i.e. for a brand to have value it must be associated in the customer’s mind with quality, service, reliability, and predictability.

Ease of Operation

The operation of a franchise business is simple and can be taught easily to franchisees. Every method or skill taught by a franchise should be quite easy to learn. Though every reputable franchise offers training to new recruits, in practice the quality and duration of the induction process vary quite widely, and the franchisor should investigate how thoroughly the franchisee will be trained in the processes of running a new business.

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What franchising can do better than any other way of running a business is to take people from a wide variety of backgrounds and with varying experience, skills, and abilities and train them to do something quite different from what they have done in the past.

Reward Based on Margin on Sales

The franchised outlet is like a hard-working business unit that works to support the demanding franchisor. Both the franchisee and the franchisor are interested in earning a share of the profits for their efforts.

This is because the franchisee and franchisor put in their money; applied themselves diligently during the training process; and, most importantly, they continue to strive daily to make their franchise a success. The reward will be growing businesses that are measurable in terms of Gross Margin on Sales. And after all franchisor and franchisor are in business to make money through more margins on sales.

Risk Aversion

Many people think that to succeed as a franchisee, they need to be a gambler but it is not true. Successful franchisees are risk-averse. They are willing to take some risk but want that risk to be as small and controlled as possible.

Any business start-up involves some risk of failure, but a strong franchise with a proven track record of success will minimize this risk. Successful franchisees do their homework, so they know what they’re getting into.


Advantages of Franchising

The following are the advantages of franchising:

  1. Financial Gains/Assistance
  2. Operational Control
  3. Training and Guidance
  4. Cost Effective Administration
  5. Strategic
  6. Ownership Mentality
  7. Image
  8. Brand-Name Appeal
  9. Franchisee Participation
  10. System-Wide Marketing Support
  11. Reduce Trial and Error Period
  12. Verified Track Record

Financial Gains/Assistance

Another source of income for the franchisor is created by Franchising. It is through payment of franchise fees, royalty & levies in addition to the possibility of sourcing private label products to franchisees.

It improves cash flow, a higher return on investment, and higher profits and provides other financial benefits that the franchisor enjoys such as reduced operating, distribution, and advertising costs.

The franchisor may also be able to help the new owner to secure the financial assistance necessary for running the operation. In many cases, it was observed that some franchisors have helped the franchisee to get started by lending money and not requiring any repayment until the operation is running smoothly.

Operational Control

Compared to developing and owning locations and searching for the kind of business on their own, franchisors can have a smaller central organization. Franchisee works hard to bring in better organizational and monetary results as a franchisee is usually self-motivated and he has invested much time and money in the business, which means.

Franchising ensures standardization of events/procedures, which reproduces effective quality control, consistency, better quality, and enhanced productivity levels. This also reflects on more satisfied customers and improved sales effectiveness.

If the franchisor believes that it is critical for each unit’s success as well as that of the system as a whole that each unit follows recommended marketing and operational guidelines, franchising provides one of the strongest methods of achieving that objective.

Training and Guidance

The franchisor will usually provide both training and guidance to the franchisee and as a result, the likelihood of success is much greater for national franchisees who have received this assistance.

Cost Effective Administration

The franchise business maintains a more cost-effective labor force, reduces of turnover of important staff, and can make more effective recruitment with a smaller central organization.

Strategic

So far as the franchisor is concerned, franchising means multiplying the number of locations through other people’s investment which helps them in spreading risks. Through franchise, the better opportunity could be focused on changes in the market which leads to faster network expansion and reduced entry of competitors.

Ownership Mentality

Where the franchise agreement is long-term Franchisee will have an attitude of being a business owner and is more likely to devote attention, capital, and time, to grow the business, follow the approved system, and be willing to face occasional business challenges.

Image

Considering other distribution approaches franchise systems generally have a superior image both among prospective owners and with the consuming public. This is because there is uniformity as to retail presentation, marketing methodology, and compliance with operational aspects, and one can see very precisely that these things are easier to achieve within a franchise framework.

Brand-Name Appeal

A person who buys a well-known national franchise has a good chance to succeed as the franchisor’s name is an earning card for the franchisee. This is because people are more aware of the product or service offered by a national franchise and prefer it to those offered by outlets that are not known.

Franchisee Participation

The well-managed franchise model often incorporates valuable Franchisee input and creative participation by Franchisees as all of the participants are part of a single franchise system with a common identity.

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Franchisees are more likely to participate in initiatives for the proper operation of the entire enterprise; expansion; sometimes producing new ideas. Franchisees also help in alerting the Franchisor to operational non-compliance problems created by other Franchisees in the systems.

System-Wide Marketing Support

System-Wide Marketing Support Paid by Franchisees: Franchisees are required to contribute to advertisements; promotions; and public Relations; participate in local marketing; support retail marketing and contribute to a national marketing fund, as a part of franchise systems.

Such an ability of the franchise system to pool the advertising money produces obvious competitive advantages which help in raising barriers to entry by potential competitors as well as in leveraging an already leading position in the industry.

Reduce Trial and Error Period

Reduce Trial and Error Period for Initiating and Operating Business: Franchising business arrangements help avoid the unnecessary trial and error period in starting and operating a new business. The franchisee starts his business operation by making an agreement with the franchisor and using the name and/or process of well-established brands and the image of the franchisor.

Verified Track Record

The Franchisor has already proven the business as a successful operation. It is not difficult to see how successful the operations have been when an organization has been around for five to ten years in business and has a large number of units in operation. The franchisor has proved that the location and layout of the franchisee’s store, the pricing policy, the quality of goods and services, and the overall management system are successful.


Disadvantages of Franchising

As we learn some advantages now, these are some of the disadvantages of franchising:

  1. Franchise Fees/Higher Legal Expenses
  2. Control Issues
  3. Business Relationship Issues
  4. Potential for Loss of Freedom
  5. Finding Qualified Franchisees

Franchise Fees

The larger and more successful franchisor, the franchisee needs to pay higher franchise fees. Typically, a franchise buyer pays an initial franchise fee, spends their own money to build a store, buys the equipment and inventory, and then pays continuously royalty-based sales.

The necessity of preparing franchising agreements; preparation of related documents and agreements, and filing them in various authorities represents a significant expense, although the year-to-year expenses are generally less than those initially incurred in setting up the structure and related documents.

Additional legal costs will be incurred if the company’s form of business is used to get the advantage of a separate legal entity for the franchising program.

Control Issues

As with dealerships, there may be quality control and related issues in franchise operations. To what extent the franchisees follow the established standards in terms of product, service, or process of operation remains a major concern for the franchisor.

The franchisor generally exercises a fair amount of control over the operation in order to achieve a degree of uniformity. If an entrepreneur does not follow the franchisor’s directions, they may not have their franchise license renewed when the contract expires.

Business Relationship Issues

To some degree in the development and possible success of the franchise system, franchisees typically view themselves as partners with the franchisor. A Franchisor must be psychologically comfortable working with Franchisees in terms of charting strategic directions, implementing marketing plans, etc. If properly managed, a sense of team participation can benefit the entire system.

Potential for Loss of Freedom

When a Franchisor hunts for expansion through alternative channels of distribution the act of awarding exclusive territories to franchisees may generate legal and other problems if enough care is not taken. Appropriate provisions in the franchise agreement; proper education of franchisees, and management of expectations of franchisees, can largely help in avoiding these issues.

Finding Qualified Franchisees

An important aspect is, since the franchise relationship is long term finding and educating good franchisees is vital. The key qualification of the ideal franchisee combines entrepreneurial energy with the willingness to follow the systems of the franchisor and act as a team player.

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FAQs Section

What are the characteristics of franchising?

The following are the characteristics of franchising:
1. Consistency
2. Unique Offer
3. Ease of Operation
4. Reward Based on Margin on Sales
5. Risk Aversion.

What are the advantages of franchising?

The following are the points where you get advantages of franchising:
1. Financial Gains/Assistance
2. Operational Control
3. Training and Guidance
4. Cost Effective Administration
5. Strategic
6. Ownership Mentality
7. Image
8. Brand-Name Appeal
9. Franchisee Participation
10. System-Wide Marketing Support.

What are the disadvantages of franchising?

The following are the disadvantages of franchising:
1. Franchise Fees
2. Control Issues
3. Business Relationship Issues
4. Potential for Loss of Freedom
5. Finding Qualified Franchisees.