What is Franchising

In the small business context, franchising is more clearly described as "business format franchising". This is where a company develops a product or service that is successful in the market place and the systems and procedures necessary to make the operation of the business predictable.

By definition, franchising is a method of distributing a product or service and a way of doing business based on a successful and proven business format for which money is paid, usually upfront and on an on-going basis, allowing the use of intellectual property and for the continuous provision of appropriate training and support.

For a potential franchisee, the step into self-employment is a big one, with far-reaching implications for the entrepreneur and their family. Likewise, the decision of a company to use the franchise structure for expansion is not always an easy option. In both cases, the advantages and disadvantages must be weighed up before a decision is made.

Below are a few of the key advantages and disadvantages of franchising.

  • Advantages

    Franchisors

    • Enhanced rate of expansion through lower capital and staff requirements than those needed for growth through branches
    • Reduced risk as a result of financial commitment by franchisee
    • Improved market penetration
    • Lower operating expenses as a result of owner-driven cost consciousness
    • Guaranteed distribution through a dedicated network of outlets

    Franchisees

    • Predictability through the use of a proven blueprint and coordinated systems and procedures
    • Assistance in all aspects of starting up the business, for example, staff selection and training
    • Joint advertising and promotion
    • Bulk buying power through the franchisor
    • Operational support through the franchisor's field staff
  • Disadvantages

    Franchisors

    • High set-up and development costs associated with establishing the franchise structure
    • Moral responsibilities associated with making decisions that affect other people's investments
    • Reduced control
    • Income that is often limited to royalties and prevents access to higher margins
    • Long-term returns

    Franchisees

    • Rigid operating procedures
    • Potentially high set-up costs
    • Reliance on the franchisor for major business decisions which could affect a franchisee's future earnings
    • Susceptibility to a possible deterioration in the group's reputation

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