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The main benefits and disadvantages of franchising

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 adage “in business for yourself, but not by yourself” accurately describes this motivation.

Entrepreneurs who have developed a successful business often wonder if they should franchise as a way to expand their operations. Like any business model, franchising has its benefits and drawbacks. There’s no way to know for sure whether franchising is right for a company until one evaluates its pros and cons in the context of their operations. Some of the key advantages and disadvantages are as under:

ADVANTAGES
DISADVANTAGES
Known set-up costs
Potentially higher set-up costs compared to independent small business
Cashflow lending available from some banks
Not all systems are accredited for cashflow lending
Access to existing brand and operating systems
A franchise is for a limited time only
Franchisor brand and support can reduce chances of business failure
Lack of independence to be completely innovative
Customer awareness of brand, its products and services
Risk of franchisee business failure is not eliminated
Centrally organized marketing and brand promotions
Franchises entering or developing new markets may be unknown among potential customers
Franchisee not required to be a marketing expert
Franchisees pay an additional levy for marketing in addition to franchise fees
Training in the operation of the business provided
Requirement for further marketing expenditure in local area
Training for the franchisee’s staff
Risk of franchisor choosing unsuccessful marketing strategies or tactics
Franchisor may select site or territory
Training may not meet expectations, or be primarily technical in nature
Ongoing advice, guidance and support from franchisor
Training for staff may not be available, or made available only at additional cost
Store or territory visits to support franchisees in the field
The franchisor may have little or no site or territory selection criteria
Advice and support from fellow franchisees
Support may not meet expectations
Potential often exists to grow beyond one outlet
The requirement to pay franchise fees to the franchisor
Franchisor establishes supply chain for network
Field visits may uncover non-compliance and result in a breach notice
Franchising provides an opportunity for people to more easily get into business for themselves
Risk that fellow franchisees damage the brand, and indirectly, your business
Development of ownership mentality
Saturation in a mature market could result in encroachment by franchisor or other franchisees
Avoidance of legal exposure
Franchisee may lack freedom of choice in suppliers
Value addition in existing product line
Franchisor may receive rebates on franchisee purchases from suppliers
Development of a sense of team participation
The franchisor may select the wrong people as franchisees

Entering to a new business or to a known business has both some difficulties and some easiness. The most important thing is to select the most profitable way. First of all, franchising offers a known brand name which is very important for customers and buyers because entering in a known business has a lower failure risk rate. Franchising also provides people easy setup which is also one of the most thinkable thing while entering in a business. Entrepreneurs who don’t have enough capital for buying a franchise, it is easy to find financial support for franchising. Entering a business has many important factors but buying franchising change these factors into opportunities. It does not mean that it doesn’t have any disadvantages. The known disadvantages are high cost for which people can easily find financial support, dependency which shouldn’t be known as bad because when people depend on somebody or something, it means they don’t share the risk alone. The other disadvantage is strict rules. People sometimes get nervous about rules but without rules there shouldn’t be any arrangement and companies shouldn’t grow like today. The following table summarizes the merits and demerits of franchising from SWOT Analysis point of view.

STRENGTHS
WEAKNESSES
1- Brand Recognition
2- Lower Risks for Failure
3- Easy Setup
4- Ready Customer Portfolio
5- Easy to Find Financial Support
1- High Cost
Initial Cost
Ongoing Costs
2- Dependency
3- Strict Rules
OPPORTUNITIES
THREATS
1- Entrepreneurs have chance to become their own boss
2- It offers some market opportunities like discovery and exploitation
1- Continuing growth of existing franchised competitors
2- Other new franchise competitors entering market place
3- The decline of branding in market
4- The publication of New Business Models

During the past decade, the improvement of the economic conditions of minority groups and women has become a major societal objective. A potential benefit of franchising is the opening up of opportunities for minority groups and women to own their businesses. There is no form of business or method of distribution that is more ideally suited to solve the special problems of minority citizens seeking economic betterment than franchising.

 

Franchising is still a strong and growing system of distribution. Based on a wide research, franchising offers brand recognition, lower risk rate for failure, easy to find financial support and easy set up in a business. On the other hand, franchising has also some difficulties which are high costs, strict rules and dependency. When these are taken into consideration, franchising becomes more advantageous.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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