South Africa

 
 

Advantages and disadvantages

The advantages and disadvantages of franchising

 

For a prospective franchisee, the step to self-employment is a big one, with far-reaching implications for the entrepreneur and their family. Likewise, the decision by a company to establish a franchising system for expanding its concept is not always an easy one. In both cases the pros and cons must be weighed up before a decision is made. Below are some of the advantages and disadvantages of franchising. This list is by no means exhaustive and other issues may be raised.

 

Advantages to franchisees:

  • Predictability by way of a proven blueprint and coordinated systems and procedures.
  • Assistance is provided in all aspects of starting up the business, for example, training, shop fitting and lease negotiation.
  • Joint advertising and promotion.
  • Bulk buying power can be exercised through the franchisor.
  • Access to expert services, such as market research and product development.
  • Operational support through the franchisor’s experienced field staff.

 

Disadvantages to franchisees:

  • Rigid operating procedures.
  • Potentially higher set-up costs as a result of the need to maintain corporate identity, coupled with intangible expenses (for example, royalties and advertising).
  • Reliance on the franchisor for major business decisions, which could affect the franchisee’s future earnings.
  • Susceptibility to possible deterioration in the group’s reputation.

 

Advantages to Franchisors

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

 

Disadvantages to Franchisors

  • High set-up and development costs associated with establishing the franchise structure.
  • Moral responsibilities resulting from making decisions that affect other people’s investments.
  • Reduced control.
  • Income is often limited to royalties, which prevents access to higher margins.
  • Little immediate financial benefit is realised.

 

 

BizDirect Response Centre

0860 109 075 / +27 11 299 4633

Bizdirect@standardbank.co.za