Merits & demerits of franchising

Merits and demerits of Franchising

Chapter2

Objectives

• The Importance and merits for giving franchise .

• The Importance and merits for becoming franchise .

• Key drawbacks of owning a franchise .

• Key drawbacks of giving a franchise.

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Introduction

• The very concept of franchising is expansion of a business enterprise through a network of franchised units.

• Franchising offer multiple benefits of low capital expenditure, Personal commitment and motivation.

• Franchising benefits for Society, Franchisees, Franchisor

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Franchisees benefits

• The trademark of the Franchise and the product sold appear to be valuable

• Franchisee is willing to pay something to sell these commodities.

• Franchisees business benefits from goodwill & brand name.

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• Franchisor often gives managerial advice to the Franchisees.

• Franchisees lack of basic or specialized knowledge and experience is overcome by training program.

• Earn profit without investing high capital

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• An experienced Franchisor is fully aware of what to do & what not to.

• There are many he requires to know about lest he may face unending problems.

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• The Franchisees will usually need less capital than he would set up a business independently.

• All leading banks offer special package to Franchisors worth a name than they would to small time dealer.

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• In a way the Franchisees become an entrepreneur and opens a business with substantial assistance.

• The Franchisees should have access to the Franchisors research and development department.

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• However no Franchisees should consider that because he is coming under the umbrella of the Franchisor ,he is not going to expose any risk at all.

• What makes Franchise different from other business is it gains from Franchisor the entire business concept.

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Advantages of Franchise ownership

• Overall competitive benefits

• The brand identification often provide new Franchisees with established customer base

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• Preopening benefits

• The Franchisors have learned from mistakes & advice new Franchisees not to repeat those.

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• Ongoing benefits

• In exchange for paying royalty Franchisees receive training program.

• Professionally designed point of sale created

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Franchisors benefits

• The Franchisor can earn a reasonable profit without involving high capital risk.

• Expenses towards developing Franchisees are covered by frontend fees & royalty

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• The Franchisor is safe from the risk of financial loss in case a Franchisees unit fails to pick up.

• The Franchisor acquires the advantage of bulk buying facilities & payment terms.

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• The Franchisee invests money ,time & effort in buying the Franchise

• She/he will become independent & self employed entrepreneur.

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• When a sub unit fares well ,the Franchisor also earns more.

• The Franchisor is free from motivating managers , to fix targets for staff.

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• Reduced daily involvement

• The Franchisor provide all the business format to Franchise.

• The Franchise is responsible for day to day administration.

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• He will be able to carve out new strategy or think about innovative technology.

• Instant possession of a memorable name and status automatically lead to increased sales.

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Demerits of Franchisee

Just as two sides of coins there are certain drawbacks and shortcomings too.

– They are loss of ownership

– Lower profit

– Interdependence

The Franchisor owns the business format,

He controls whole activity.

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• Loss of ownership

• The Franchisor explains ,discusses and places suggestions intend of commanding & instructing.

• Over the period Franchisee gains experience & his confidence gets boosted.

• He may start asking questions on certain policies

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Lower profit

• Franchising to have certain teething problems.

• The finance crunch will be one of difficulties of a Franchisor

• Advertising and marketing become costly affair

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• Lower profit

• This low income coupled with initial negative cash flow may tempt a Franchisor to search for speedier and larger financial gain.

• Also asking higher rate of royalty may show an upward mobility of income but may end disaster later.

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Interdependence

The success of Franchisee has heavy dependence on mutual trust and co-operation between both partners.

On the part of the franchisee ,it become mandatory for him/her to follow laid down terms

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Interdependence

• These measures would be definitely lead to a successful Franchise.

• On the other hand sticking to outdated policies will ruin the Franchisee leading to bankruptcy.

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Hard work & Effort

• There goes a common belief that Franchising is easy way to get rich fast.

• It is easy reaching & negotiating for suitable property

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Hard work & Effort

• It will be tedious and monotonous to keep the premises spick and span.

• Financial commitments will have to be made as per situation demands

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• Constant Payment

• After meeting the initial expenditure the Franchisee has to make regular royalty payments to the Franchisor

• This constant continued payment for a long period becomes an irritant for a Franchisee

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Inflexible rules & Procedures

• The Franchisee is under obligation to operate strictly under guidelines laid in operations manual.

• The Franchisor checks up in every detail to ensure that procedures are religiously followed

• If found otherwise the Franchisee could be ousted by terminating agreement.

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Inflexible rules & Procedures

• Apart from getting green signal from the Franchisor he has to bring the other Franchisee in the network in line.

• In case the Franchisee wants to wind up and sell the outgoing concern ,the Franchisor can be obstacle.

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Mutual Dependence

• The relationship between Franchisor and Franchisee is one of interdependence.

• They are dependent on each other to make business successful.

• They could be pulled up by media for mistreating their staff

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Demerits for a Franchisor

Disadvantages to a Franchisor

• Control & co-ordinate a network of semi-Independent businessmen .

• The policies and monitoring standards by the Franchisor is vital but can at times be difficult.

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Disadvantages to a Franchisor

• This may be personality clashes between Franchisee & members of Franchisor team.

• It will be quite apparent that a Franchise is no way agent or representative of a Franchisor

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Disadvantages to a Franchisee

• This Ongoing payments and strict protocols can be oppressive to aspiring entrepreneurs.

• While buying into a franchise can provide a more solid ,established introduction to business world.

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Expenses

• Buying into Franchise is not cheap

• The initial cost of Franchise can be 10to 12 lakhs or more

• Franchisee must pay ongoing royalties to the parent companies.

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Expenses

• These payments can vary from standard rates to percentage of profit.

• The Franchisor may also require payments for training & other services.

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Protocol

• Due to strict protocol established in contracts and operations manual there is little room for creativity.

• That rigidity ensures consistency among a firms Franchisee

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Protocol

• Another potential drawback of owning a Franchise is that Franchisors places a number of restrictions on their Franchisee .

• These restriction can make a variety of forms including limitations on product.

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Name association

• In a Franchise model ,the name association is touted as tremendous benefit to starting entrepreneurs.

• Some companies try to make money by just collecting Franchise fees

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Name association

• Name association is widely seen as one of the major benefits of Franchise ownership.

• The best protection against this is to make sure the Franchisor has a time tested and solid reputation within the industry.

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Name association

• Main disadvantages is loss of control

• The Franchisee’s reliance on the power of the Franchisor’s brand may prove to be a disadvantage, if the Franchisor fall into dispute.

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Limited Potential

• Automatic restriction on growth are a major drawback of franchising.

• Growth potential Franchised operation is limited by a couple of factors.

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Limited Potential

• Another factor that limits the growth potential of Franchisee is Franchisees cannot Franchisee.

• Franchisee’s business may suffer as a result of an error on part of Franchisor.

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Obligation

• According to the International Franchise Association, the average length of a Franchise agreement in 2009 was 10.6 years.

• Franchised business tend to be highly specialized.

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Obligation

• The Franchisee will not have the unfettered right to sell his business.

• The Franchisee may become over dependent on the support of the Franchisor .

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No guarantee

• Usually there is no guarantee of financial success for the Franchisee.

• While the estimated startup costs of the Franchises are an implied earning claim .

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Conflicts

• Franchisor/ Franchisee relationship can easily cause conflict if either side is incompetent .

• As a Franchisee ,he has little legal source.

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Summary

Merits

Franchisee

• The trademark of the Franchise and the product sold appear to be valuable

• Franchisee is willing to pay something to sell these commodities.

• Franchisees business benefits from goodwill & brand name.

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Summary

Merits

Franchisee

• Franchisor often gives managerial advice to the Franchisees.

• Franchisees lack of basic or specialized knowledge and experience is overcome by training program.

• Earn profit without investing high capital

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Summary

Merits

Franchisor

• The Franchisor can earn a reasonable profit without involving high capital risk.

• Expenses towards developing Franchisees are covered by frontend fees & royalty

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Summary

Merits

• The Franchisor is safe from the risk of financial loss in case a Franchisees unit fails to pick up.

• The Franchisor acquires the advantage of bulk buying facilities & payment terms.

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Summary

Demerits

Franchisee

– They are loss of ownership

– Lower profit

– Interdependence

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Summary

Demerits

Franchisor

• Control & co-ordinate a network of semi-Independent businessmen .

• The policies and monitoring standards by the Franchisor is vital but can at times be difficult.

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Merits and demerits of Franchising

End of Chapter2

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Merits & demerits of franchising

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Transcript of Merits & demerits of franchising