Disadvantages of Franchising

Disadvantages of Franchising

Business franchises have become very common in today's 'glocalized' world, but parties entering into such a partnership should know the pros and the cons of franchising before they set up shop...
Globalization has undoubtedly brought the world closer together, and business organizations have benefited tremendously from the effects of this change in the world order. International borders are not strong enough to prevent companies from expanding overseas today, and franchising is a term that has been brought to the world's attention as a result of this. As workers, ideas and brand names travel across the oceans and penetrate new markets, it is the business organizations that provide these services who benefit the most.

Opening a franchise is beneficial for both the parties involved, especially if the said franchise happens to be an international one. The owner of the chain is known as the franchisor, and this party lends his brand name, his trademarks and logos, his trade secrets and his business operation processes to a franchisee. The franchisee pays the franchisor a fixed amount and makes use of all this business paraphernalia and opens a chain of the franchisors business, and then runs it himself.

Subway is the best example to study for anyone who wishes to understand more about business franchising. Subway has recently become the biggest franchise in the world with around 35,000 outlets all around the world, and their modus operandi is based solely on the method of business franchising. The headquarters of Subway is in Connecticut, but it manages to run their thousands of outlets due to the benefits of franchising. An entrepreneur in a distant country, say India, who wishes to open a sandwich chain can become a franchisee of Subway, and open a Subway outlet in their city. Subway will grant the individual their brand name, their logos, their recipes and their trade secrets, while the franchisee will run the Subway chain and get a share of the profits from his operations.

The Downsides of Franchising

Without a doubt, franchising has many great benefits for the franchisor and the franchisee, but there are several disadvantages that come along with this kind of a business operation as well. These should not serve as a means to discourage potential franchisees, but it should merely serve as a warning about the repercussions of learning how to open a franchise.
  • The single biggest disadvantage for a franchisee is that the profits that he makes need to be shared with the franchisor. This is the primary rule of business franchising, and it may result in a level of resentment for some entrepreneurs. They will soon find that instead of being the boss of themselves, they are still at the beck and call of someone above them, and this will rankle them to some extent.
  • The franchisor also has several rules and guidelines to follow, and the franchisee has to abide by these as part of the business plan. This means that the franchisee will be unable to make changes to the business structure and other aspects. In certain countries, companies need to change certain habits to be successful, and this is something that most franchisors do not allow, even if it makes good business sense.
  • Though opening a franchise helps the franchisee save on several costs of setting up a business from scratch, there are several hidden costs that are a part and parcel of this partnership as well. The actual costs can run pretty high, and this is something that the franchisee should be aware of and prepared for.
  • Inadvertently, the business of the franchisee depends on the franchisor. If the franchisor is in the news for the wrong reasons, or goes bankrupt, the franchisee will also suffer the consequences. The fate of both parties is interlinked, and this takes some getting used to.
  • From the franchisors point of view, this is a risky venture as well. They will be needed to disclose many of their secrets and structures, and it is likely that the franchisee is merely a competitor posing as one in order to gain this information. It can be subsequently be used against the franchisor himself.
While business franchising is an innovative and useful way to run a business, there are several risks involved as well. The franchisee should be prepared for these things, and should also know when to put his foot down. With the right balance the partnership can be a hugely successful one, but if the franchise is not managed properly, it can prove to be a major setback for the franchisor and for the franchisee as well.
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