The advantages and disadvantages of franchising are many. A franchise is a major decision for a business to make.
Tahir Basheer of Sheridan’s law firm outlines the main advantages and disadvantages of franchising as a business model from the perspective of the brand owner.
A company franchising their business (the ‘franchisor’), in essence, provides another party (the ‘franchise’), with all the building blocks required to create a successful business.
For example, they will provide the brand: the trademarks, designs and marketing materials as well as project management, buying and operational support. The franchise uses those building blocks in exchange for the risk in the business: they rent the premises, pay their staff and so on.
Franchises are often found in the food industry, such as big brands like KFC. But the franchise model can also extend into the fashion industry. A good example of a successful franchise is Tommy Hilfiger – a third of their 1,000 stores are run by franchise partners. In their own words, the Tommy Hilfiger franchise “merges global brand management with local retail excellence.” Another successful example is Gap. Gap doesn’t franchise in their major markets like the US and UK where they have company-owned stores, but they do franchise in other countries as a way to enter the market.
Let’s look into the advantages and disadvantages of franchising:
Advantages of Franchising
- Cost-effective growth
The main benefit for a franchisor is that they can utilize a franchisee’s capital and manpower to expand its own business, and increase its presence in the market. As the franchise will contribute to the bulk of the start-up costs, franchising allows the franchisor to increase its outlets faster than if it were directly financing its own expansion.
- Motivation and incentive
Franchisees are responsible for their own franchise and are likely to be more committed to success than an employee would be. Franchisees are often entrepreneurial-minded individuals who have invested a considerable amount in the franchise. They have a strong incentive to make your business a success.
A franchisor is able to focus on other aspects of their business. This is particularly true once the franchise is experienced and able to operate with minimal control – then the work of the franchisor is merely managing the franchise. This provides the franchisor with more time to focus on other aspects of the business.
Under the terms of the franchise agreement, the franchisor could insist on the franchisee contributing a certain amount of gross sales towards the advertising of the business. This would assist the franchisor in increasing public awareness of the business.
Disadvantages of Franchising
- Loss of ownership and control
The franchisor has to share ownership of the business product/idea/concept with the franchise. Although the franchise agreement would impose restrictions on the franchise, the franchise will have a degree of freedom which could cause further issues as outlined below.
Franchising will inevitably involve the disclosure of confidential information and know-how from the franchisor to the franchise. The franchise agreement should always contain a confidentiality clause, but in any event, it is difficult to monitor and enforce such a clause.
The franchisor will need very different skills and experience to run and control a franchise than it would be operating a normal business and controlling employees. Accordingly, and even though the franchise agreement would impose certain controls over the franchise, the franchisor will often have to negotiate and co-operate with a franchise rather than instruct and manage them.
- Rogue Franchisees
Although the franchisor will monitor the franchise, it is possible for things to go wrong. For example, the franchisee may not reach the franchisor’s quality standards or they may act in such a way that damages the overall reputation and brand of the franchise business.
It often takes longer to implement change and introduce new products to a franchised business in comparison to a normal business network.
To create a franchise it is vital for brand owners to have a formal agreement of the terms of the relationship. A major positive for brand owners is that much of the bargaining power in the relationship initially belongs to them, especially if there is a strong concept. So they can seek to exert maximum control over the relationship in order to avoid some of the problems discussed above.