Advantages from the franchisee's viewpoint
By commencing operations under the umbrella of an established franchisor, using his trademark and operating in accordance with tried and tested operational principles, members of a franchise network are effectively insulated from the many mistakes new entrepreneurs are apt to make, especially during the start-up phase.
Once operational, and by utilizing the "store opening package" most franchisors have in place, franchisees can expect to gain a reasonable share of their local market and achieve break even more quickly than would otherwise be the case.
On an ongoing basis, access to the large company infrastructure maintained by the franchisor, and accessible to franchisees, will enable franchises to concentrate on the management of their businesses and build lasting relationships with customers while the franchisor takes care of the "bigger picture". Franchisor services will typically include brand building, marketing and operational guidance and control. Furthermore, economies of scale, listed earlier in this article as a franchisor benefit, will benefit franchisees as well, especially in two areas:
- Group marketing efforts will see to it that the impact of every advertising rand is maximized. By way of example, an advertising spend of R5000 per month, when pooled with similar contributions by, say, 50 members of a network, creates a sizable marketing fund, while R5000 spent in isolation by an independent operator is unlikely to make any impact at all.
- The combined purchasing power of the network will help franchisees to secure preferential deals with key suppliers. Although this will vary from industry in industry, it is not al all uncommon that savings achieved by franchisees through access to bulk deals pay the lion share of ongoing franchise fees. One more advantage comes to mind, intangible perhaps but of no less importance. It can be best summed up by the well-worn phrase "To be in business for yourself but not by yourself".
Entrepreneurship can be a lonely occupation, and while independent operators would be reluctant to speak to others in their industry, for fear of giving something away to a competitor, franchisees, as members of a network of individuals sharing similar experiences and concerns, are free to exchange ideas with the franchisor and also their peers.
It is only natural that while franchising has numerous advantages, it has some drawbacks as well, and it would not be in anyone's interest to overlook these. Regardless of whether you are a prospective franchisor of franchisee, you should be aware of the pros and cons of the franchise system and weigh them up carefully before coming to an informed decision on the merits of franchising, taking your existing circumstances into account.
Disadvantages for the franchisee's viewpoint
Cost: Franchisees are expected to pay an up front fee as well as ongoing fees. Setup costs, to may be above average, as the franchisor, having invested a great deal of money into the development of the corporate image, will not permit shortcuts. On the other hand, discerning consumers may well be attracted by an image exuding professionalism all-round, and break even may be reached sooner. In a similar vein, the cost of ongoing fees will be offset by bulk purchase advantages and benefits flowing from the franchisor's support mechanism.
Controls: Although franchisees own the infrastructure of their businesses, they are contractually bound to adhere to the franchisor's operational guidelines. For and individual determined to "do it it his way", this can be a source of constant irritation.
Restriction on the sale of the business: An independent operator is free to sell his business whenever he wants to and to whomever he chooses. He does not need to concern himself with the suitability of the purchaser to operate the business according to the franchisor's guidelines; it is simply a matter of willing seller / willing buyer. Franchisees, on the other hand, will find that the franchise agreement places restrictions on them in this regard.
The flip side is that a 'branded' business may be easier to sell, and may even command a higher price.
Franchisor failure: Franchising is often likened to a marriage, and there is some justification in this statement. Generally speaking, franchisees are bound to the franchisor "for better or worse". Should the franchisor make a bad business decision, franchisees' success chances could be severely hampered.
It is well worth nothing that the franchisor / franchisee relationship is not intended to be a partnership in a legal sense. Should the franchisor go out of business, franchisees' assets can normally not be touched by the franchisor's creditors. In any event, cases of franchisor failure are extremely rare and, should the unthinkable really happen, there would be nothing to stop franchisees from grouping together and carrying on "business as usual".
Disadvantages from the franchisor's viewpoint
Suitability of the business: Contrary to statements bandied about by overenthusiastic promoters of franchising, not every type of business can be franchised. The franchisor's personality traits and the corporate culture of the business to be franchised must also be considered before this important step is taken.
Initial costs: For from being a "get-rich-quick" scheme, the establishment of a bona fide franchise operation will demand a significant investment in the form of development costs. And once early franchisees are operational, they will need an awful lot of "hand-holding", precisely at a time when their sales figures will typically still be low. This will impact on the franchisor's income stream from management services fees and is likely to cause initial losses in the operation of the support structure.
As soon as a reasonable number of franchises are up and running, and early franchisees begin to mature, the franchisor's income flow will become increasingly attractive.
Reduced flexibility: Once the decision to franchise has been made, it is extremely difficult to reverse it. And at operational level, franchisees look towards their franchisor for direction. Frequent changes in policy will lead to confusion, followed by and erosion of confidence.
Problem franchisees: Having made a significant investment in their businesses, franchisees cannot be treated like managers and simply fired, should they under perform.
To maintain the network's morale intact, struggling franchisees will have to be given "intensive care" before the decision is taken to terminate their agreements. This can be frustrating, time-consuming and costly. The antidote to this particular problem? Careful franchisee selection - it is unlikely to eliminate the problem, but it will go a long way towards keeping it manageable!
