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