Explain the nature of franchising. Discuss the advantages and disadvantages for both the franchisor and the franchisee.

Authors Avatar

FRANCHISING

Question: Explain the nature of franchising. Discuss the advantages and disadvantages for both the franchisor and the franchisee.

Franchising is ‘a continuing relationship in which the franchisor (the owner of a company) provides a licensed privilege to the franchisee (the buyer) to do business and offers assistance in organising, training, merchandising, marketing, and managing in return for a consideration. It is a form of business by which the franchisor of a product, service, or method obtains distribution through affiliated dealers (franchisees).’ (http://www.business.gov) A franchise is essentially a replica of an existing business. When you purchase a franchise, you buy the rights to use the parent company's name and to sell its product or service in exchange for an up-front franchise fee and ongoing royalties, which are usually between 3 and 6 percent of sales. While buying a franchise does have certain disadvantages, the right franchise can provide a certain amount of security that is often missing from new ventures. The franchisor and franchisee’s aim is to create a strategic alliance with a common goal to dominate a market. Although there are many advantages for both the franchisor and franchisee, there are also many disadvantages and I will be analysing these throughout the assignment.

Advantages of franchising for the franchisor include increased flexibility. It offers franchisors the ability to expand their brand very rapidly into many new markets across countries and continents, as well as reaping enormous profits in the process, while the franchisees do all the hard work of dealing with customers and selling the product. ‘The franchisor also benefits from the fact that the franchisee, being a sole proprietor in most cases, is likely to be very highly motivated to succeed. The success of the franchisee means more sales, which translate into higher royalties for the franchisor.’ (S. Dibb et al, p335) Franchisors will also gain additional outlets for the distribution of products and services without having too many costs, such as hiring employees and acquiring facilities and equipment. A franchisor may also require the payment of an up front franchise fee, providing immediate revenue. The franchisees, having made a substantial investment in their own businesses, can be relied upon to maximize market penetration of the franchisor brand name on an ongoing basis and to deal with emergencies as they arise. But while franchisees can be expected to finance and manage their own outlets, the franchisor still retains overall control of the brand and its development. ‘As a result, expansion can proceed at a much faster pace than would otherwise be possible, enabling the franchisor to achieve increased market share whilst benefiting from economies of scale.’ (http://www.butterfield.co.za) Finally, franchisors can benefit from the cultural knowledge and know-how of local managers. This can be helpful in lowering the risk of business failure in unfamiliar markets, as well as creating a competitive advantage.

Join now!

Franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and way of doing business, as opposed to building a new business from scratch.  The franchised business is based on a proven idea and has an existing customer base, therefore making it much easier to sell your product than it would if you were to start up your own business. By buying into a franchise you are gaining the benefit of the franchisors experience as well as the name and reputation that has already been built up by the franchisor.  Therefore it is ...

This is a preview of the whole essay