Figure1 Number of Franchisees in different sectors in 1998(BFA)
Recommendation
In this report the advantages and disadvantages of franchising from the perspectives of both the franchiser and franchisee will be indicated, which should be taken full consideration before purchasing a franchise. Other factors related to franchise will be illustrated at the end.
Important Findings
The Advantages of Franchising
There are obvious and clear benefits in buying a franchise, among which the most significant one is that, as already stated, we purchase a tried and proven business concept. Compared with the other new start-up business in the same market, the risks are substantially reduced due to the continuous assistance from the franchisor. Meanwhile, the possibility of failure in franchising business is also minimised. Under the investigation made by Phil Stone( Buying a Franchise,2001), it is estimated that whilst one in five new-start business will be trading after five years, some 90% of franchise operations will have succeeded.
Secondly the public have already been aware of the recognized brand image, including the name, an established interior and exterior design of the business premises. Moreover as part of the contractual agreement, publicity and marketing research will be arranged through the ongoing advertisements or promotions of the product or service by the franchisor.
Comprehensive training on production as well as management in all aspects of running the business will be supplied both at the initial stage and in progress along with the improvements.
The franchisee may also benefit from the franchisor’s better terms for the bulk purchase of raw materials or goods used by the franchise, especially under some circumstances, the franchisor is also the supplier.
The cooperation with other franchisees in exchanging the feedback and notes via network has turned out to be an effective way to review and improve the operating procedures.
A clear geographical area should be clarified for the franchisee to protect from the other franchisees within a neighbouring area.
The final advantage of purchasing a franchise relates to the opportunity to raise funds. It is generally considered to be easier to gain finance to buy a franchise than to gain finance to start a new business. The reason for this is that the franchisor will be better able to provide assessment s of the likely sales and costs, giving a more accurate prediction of profit levels. The franchisee will be responsible for the loan, nevertheless the help of the franchisor could increase the possibility that the loan is granted.
As for the advantages for the franchisors, overall the franchise can generally expand their trade name more quickly through the investment from franchisees than only through their own resources by passing the responsibility for cash and stock security in each branch. Just as it is described in the Buying your First Franchise, “The franchisor wins local commitment to the business and its customers from the investing franchisee.”(Greg Clarke, 1999)
The Disadvantages of Franchising
There are many negative effects for the franchisee, some of which are:
- Under the restrictions of the franchise, the involvement of individual activities of the franchisee is difficult no matter the product, service or design.
- Disputes over the royalty fee or management charge are very common.
- To only buy the goods and services from the franchisor results in another dispute over the disadvantageous prices.
- It can also be extremely hard to enforce territory rights. When we buy a franchise the franchisor will normally take the responsibility for not selling it to another franchisee within a defined area. However once the franchisor breaks the rule, there is nothing to stop customers from buying the same goods or services from another franchisee nearby.
- The final drawback is The bad publicity will have a serious impact on all the brand or image of the franchise as well as every single franchisee. Further there is no likelihood that the franchisee will still exist once the franchisor fails.
In respect of the disadvantages of franchisor, most importantly, even though the overall franchise operation may inevitably suffer from the failure of an individual franchisee, all the franchisor could do is no more than controlling it under the contract.
Other Factors
Apart from learning the advantages and disadvantages of purchasing a franchise, differences in the quality and background of a franchise mean we need to exercise great care when purchasing a franchise, such as methods of doing business, market research, customer relations, products or services, the royalties, advertising, the obligations, site selection, etc.
Conclusion
In summary, buying a business concept that has already been tried and proven is a safer method of establishing our own business. it is, however, not necessarily a recipe for our own success and we will still have to work hard, besides all has mentioned above, also considering the following ingredients for success such as support, funding, market awareness, to achieve prosperity in buying a franchise and make a success of it eventually.
Bibliography
- Phil Stone,2001,Buying a franchise, How to Books Ltd.(P1,P13)
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Greg Clarke, Buying Your First Franchise, 13th Edition, Kogan Page Limited, (P10)