Franchising is two or more persons or institutions coming together to further the cause of a business venture from an almost similar perspective. While one of the aforementioned parties, the franchisor to be specific, is the actual and legal owner of the business or commercial venture, the other party/parties (the franchisees) act as co-owners who expand the business and the brand by serving as growth channels. These co-owners are not the same as business partners. While a business partner invests equally or proportionately to the cost of setting up and running a business, a franchisee only invests his/her management and administration expertise and networking skills to achieve the desired amount of expansion and brand visibility. Also, neither is a franchisee an employee of the franchisor as the former does not draw a fixed, periodical remuneration from the latter. Like any other alternative course of action, franchising comes with its share of pros and cons. However, the advantages of franchising far outnumber its disadvantages, making this type of business practice one of the most successful among all others in contemporary times, the evidence of which can be seen in the existence of franchises in a diverse field of commercial undertaking - right from food and entertainment to retailing and financial services!
Advantages of Franchising Opportunities
Look around you and you can come up with at least 10 famous franchise instances in less than a minute! Don't believe me? Well, then how about this - McDonald's, Dunkin Donuts, Hampton Inns, 7-Eleven, Nike, Reebok, Adidas, Subway, Jani-King and Great Clips. See? Didn't even take a minute! So, when so many well-known names in diverse commercial fields are comfortable with franchise business plans, there ought to be something good about it for both the franchisor as well as the franchisee(s). Here's how the sunny side of the deal looks like...
Economies of Cost
A franchise business plan helps both the franchisor and the franchisee save lot of costs involved in setting up a business as well as expanding and promoting it. While the franchisee is saved from making tremendous capital investments for startup, he also reaps the benefits of not having to squander a fortune for building a brand image and advertising his fare as the brand is already a well-known one which is readily recognized by the target audience! All the franchisee needs to do is serve the products or services to the consumer, who walks in drawn by the already-existing brand cognizance, on a silver platter! As far as the franchisor is concerned, he benefits from this kind of business plan as he gets to save a lot when he does not have to spend staggering amounts of money on distribution chains and paid middlemen. Also, as far as expansion at the individual franchise unit level is concerned, the investment is mostly done by the individual franchisee. Just imagine the franchisor financial leverage who has at least 50 franchisees under him, all over the world, with each unit generating a decent amount of revenue each quarter!
Economies of Scale
A franchisor that has to supply bulk stock periodically to a number of franchisee location manufactures, processes and transports in bulk as well. All these enable the franchisor to enjoy economies of scale in the form of trade/cash discounts on bulk purchase of raw materials, optimal utilization of manufacturing, processing, storage and transportation capacity, etc. Also, a franchisor gets a hang of the amounts required to be supplied to each franchisee periodically and this gives him a clearer picture of the aggregate expected demand. This in turn helps him maintain an equilibrium between ordering and carrying costs.
Sharing Rewards and Worries
Hired personnel get fixed remunerations (more or less) and that does not do much to make them put in extra efforts towards business administration and revenue generation. However, when it comes to being directly responsible for the amount of profit generated by their individual units, franchisees would, but naturally, show more interest in furthering the cause of the franchisor as the franchisee's own share in such a revenue is at stake! Also, it is the franchisee's efforts on the unit level that determines what proportion of the stock gets cleared profitably. This means that stock clearance and revenue generation is a headache that's shared between the franchisor and his franchisee(s).
Franchisees of a business are usually local residents of the geographic market area where the franchisor wishes to set up a franchise store. As such, the franchisee is in a better position to gauge the regional target audience's reaction or response towards the franchisor's brand. This equips him to provide practical inputs to the franchisor who can draft or modify his marketing strategies for the individual franchise location-based on such input.
Expert Support and Training
The franchisee is provided with all the necessary training, material and information support necessary for carrying out business in the franchisor's name in his individually allocated location. Also, the franchisor, with his years of experience in his chosen line of business, is always there for reference and advise in case the franchisee faces any business or market related issues in operating the franchise unit.
Network Decides Net Worth
Each franchisee is well-versed with his local demographics and has his own set of social connections. This helps him to further expand his business network in the local market, leading to increased awareness of the franchisor's brand. Also, personal social contact is a very effective tool in converting competitors' customer's to one's favor!
Speaking about the cons, the most notable disadvantage of a franchise seems a lack of flexibility in certain areas. The franchisor may want to dictate or oversee how the franchisee runs his operations or may take upon the responsibility of approving or rejecting prospects in the event the franchisee wishes to sell off his franchise. Come to think of it, the franchisor puts his blood and sweat to get his business where it is today and that gives him a right to impose a certain amount of restrictions as a precaution against possible loss or damage!
Flipping the coin on the other side, the franchisor himself may have to bear the losses incurred by a franchise unit owing to ill repute suffered by the brand in that local market as a result of unprofessionalism on the franchisee's part. The most serious disadvantage of a franchise is the franchisee's dependence upon the franchisor. Imagine the immediate financial plight of the franchisee in the event the franchisor decides to sell off or shut down the business! Now, considering all the pros and cons of franchising, it can be deduced that the advantages far outweigh the disadvantages. Effective communication, practical planning, mutual understanding and interpersonal compatibility between the franchisor and the franchisee can easily take care of all the rainy day issues.