Franchises - Definition, Advantages and disadvantages

A franchise is a commercial system or business scheme in which both the franchisee and the franchisor have a legal agreement where the franchisee manages the business according to terms specified by the franchisor.

For all entrepreneurs, it has always been the debate of whether starting a business from scratch or acquiring a franchise. It is important keeping in mind that franchises are not always a feasible business for everyone; nevertheless, it is an attractive idea as it has its advantages and disadvantages.

Advantages of acquiring a Franchise

In general, the greatest advantage of acquiring a franchise is the possibility of having success. This is because franchisors offer a business model which has been proven to be successful. A study revealed that franchises are the most successful business models compared with other models. There are different factors that explain this success. This is because franchisors are very selective in their search for franchisees. There are other three specific benefits of franchises:

Training

Most franchises offer a training program which is invaluable for many small business entrepreneurs. This helps increasing the managing skills, which may be insufficient for some people. On most cases, training is an important advantage in the franchise system as it allows people with low academic formation or poor training to start and have success with their own business.

Financial Support

The costs of starting a business from scratch could be often pretty high, and the financial sources of an entrepreneur are mostly limited. In these days, having a debt that might lead to lose a business is not a real option. By associating to a franchise organization, the entrepreneur might increase the probability of having financial support. If the franchise considers a candidate as adequate, they offer financial support. Still, the franchisee must pay its part. However, this can be adjusted with a scheduled payment which the entrepreneur may pay without trouble if it has success.

On the other hand, associating with a franchise with a good reputation increases the probability of getting better credits from banks.

Operational Benefits

Most products and services provided by franchises networks are well recognized. Therefore, a franchise offers a proved business line. Any entrepreneur, who acquires a contract with a franchise, acquires the rights of using all brands and symbols of the franchisor which are usually well branded and have authority in the market. Besides of products and brands, a franchise offers methods of marketing and management, which has been widely proven and developed. All this allows franchisee to work more efficiently.

Disadvantages of acquiring a franchise

I have shown the positive side of a franchise, so it is time knowing about its negative side. Particularly, Franchises have four main disadvantages:

Costs

Generally, the successful the franchise is, the higher cost it demands. These costs have several components to consider:

1-Inital Payment: The total cost of a franchise starts with an initial payment which varies from several hundreds to thousands of dollars. For example, MacDonald’s initial fee is of 45,000 US.

2-Investment costs: There are some costs such as rent, point of sales construction, staging of inventory that can be pretty significant. Moreover, some other costs such as insurance and other initial expenses should be considered. Franchises with a good reputation will often provide an estimate of the investment cost.

3-Payment of royalties: A common practice among franchises is to receive royalties. This is calculated as a percentage from the gross income. The procedure varies from company to company. For example, McDonalds charges a service fee.

4-Advertising costs: Some franchisors require franchisee to contribute with the funds for advertising. These costs are usually a percentage from the total of the sales or even more.

Restrictions on business operations

Franchisors concern about the image of their business so they do the effort to control certain aspects of the business:

1-Restriction on sales locations

2-They demand the approval of the retail store site and impose their requirements.

3-They restrict which goods or services are sold.

4-They limit advertising and the operation time.

Loss of independence

It is common that people with regular salaries drop everything down to start a business. This usually is because the freedom of taking own decisions and not having supervision. However, a relation with a franchise can lead to another type of dependency. The franchisee gives a lot of its independence when it signs the contract with the franchise. Although the influence of the franchisor in all business operations could be useful, the control level exercised may be unpleasant to an entrepreneur who loves being independent. This issue varies from company to company; some contracts have extreme terms that cover issues without importance. It is important to mention when the franchisee does not respect the rules it will lose the contract with the franchise.

Lack of support from the Franchisor

As in every relationship, it could be tension between the franchisor and the franchisee. It can be the case when the franchisee feels that the franchisor is not following its part of the deal. This may lead to disputes. These disputes can be in turn on a training issue, insufficient support or any other issue. Once there is a breach in the communication between both parts, the welfare of the relation is in danger.