Advantages and Disadvantages of Franchising

Advantages and Disadvantages of Franchising

Franchising is a process for rapid market expansion but it is gaining traction in other parts of the world. Franchising works well for firms that have a repeatable business model that can be easily transferred into other markets.

Franchising is a specialized form of Licensing in which the franchiser not only sells an intangible property to the franchise but also insists the franchise agree to abide by strict rules as to how it does business.

Advantages of franchising –

  • The risk of business failure is reduced by franchising.
  • Products and services will have already established a market share. Therefore there will be no need for market testing.
  • One can use a recognized brand name and trademark by franchising.
  • The franchisor gives support – usually, as a complete package including training, help set up the business, a manual telling you how to run the business and ongoing advice.
  • No prior experience is needed as the training received from the franchisor should ensure the franchise establishes the skills required to operate the franchise.
  • A franchise enables a small business to compete with big businesses, more so than an independent small business, due to the pool of support from the franchisor and network of other franchises.
  • One usually has exclusive rights in your territory. The franchisor won’t sell any other franchises in the same territory.
  • Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
  • You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
  • Relationships with suppliers have already been established.

Disadvantages of franchising –

  • Costs may be higher than expected.
  • The franchise agreement usually includes restrictions on how you can run the business. One might not be able to make changes to suit your local market.
  • One may find that after time ongoing franchisor monitoring becomes intrusive.
  • The franchisor might go out of business.
  • Other franchises could give the brand a bad reputation, so the recruitment process needs to be thorough.
  • One may find it difficult to sell your franchise.
  • All profits are usually shared with the franchisor.

The inflexible nature of a franchise may restrict the ability to introduce changes to the business to respond to the market or make the business grow.