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Weighing up advantages and disadvantages of a franchise

In this article we will examine two aspects. Firstly, we will look at the advantages and disadvantages of franchising from the perspective of the franchisee. Secondly, we will review the factors to be considered in assessing the type of business which is the subject of the franchise proposition.

Advantages
1. The franchisee’s lack of basic or specialised knowledge is overcome by the training programme of the franchisor.

2. The franchisee has the incentive of owning his own business with the additional benefit of continuing assistance from the franchisor. The franchisee is an independent businessman operating within the framework of the franchise system. This provides the opportunity through hard work and effort to maximise the return from his business and the value of his investment.

In all franchise networks there are three basic levels of performance, despite the fact that all franchisees are provided with the same raw material.

There are the high flyers who do extremely well, having the right attitude and approach, as well as some entrepreneurial skill which enables them to make the most of their opportunities. Then there are the average performers, who operate the system and basically achieve the anticipated performance levels. Their attitude and approach is sound, but they lack the flair of the high flyers. They will earn a decent living in line with their expectations. Finally, there are those whose performance levels are low. These are people who joined the franchise with the best of intentions, but they now lack the will or the aptitude, or have changed their mind and want to get out of the franchise. They clearly made a mistake in the first place by going into self-employment, and they perhaps deluded themselves into believing that their franchisor would remove all the risk for them.

3. In most cases, the franchisee’s business benefits from operating under a name and reputation (brand image) which is already well established in the mind and eye of the public. Of course, there will be new franchise schemes which are in the process of being established and in which the name will not yet be so well known. This is a factor to recognise and to make allowance for. Picking a sound, newer franchise in its early stages can be a good proposition, but the risks are higher.

4. The franchisee will usually need less capital than he would if he was setting up a business independently because the franchisor, through his pilot operations, will have learned how to make the most cost-effective use of resources and to eliminate the risk of purchasing unsuitable items.

5. The franchisor provides the franchisee with a range of services which are calculated to assist, so far as is practicably possible, the franchisee in enjoying the same as or a greater degree of success than the franchisor has achieved. These services will include:

  • The application of developed criteria for site selection and identification of a trading location or, if the franchise is based upon a mobile operation, the area within which the franchisee will draw his customers.
  • Guidance to the franchisee to assist in obtaining occupation rights to the trading location, complying with planning (zoning) laws, preparation of plans for layouts, shopfitting and refurbishment, and general assistance in calculating the correct level and mix of stock and in the opening launch of the business.
  • The training of the franchisee and his staff in the operation of the business format and the provision of an operational manual with detailed instructions.
  • The training of the franchisee and staff in any methods of manufacture and preparation which may be appropriate.
  • The training of the franchisee in methods of accounting, business controls, marketing promotion and merchandising.
  • The purchase of equipment.
  • Guidance in obtaining finance for the establishment of the franchisee’s business.
  • Getting the newly franchised business ready for trading and opened.

6. The franchisee receives the benefit on a national scale (if appropriate) of the franchisor’s advertising and promotional activities. It is usual for the franchisees to make a contribution to the funds which are expended for this purpose.

7. The franchisee receives the benefit of the bulk purchasing power and negotiating capacity which are available to the franchisor by reason of the existence and size of the franchised network.

8. The franchisee has at his disposal the specialised and highly-skilled knowledge and experience of the franchisor’s head office organisation while remaining self-employed in his business.

9. The franchisee’s business risk is greatly reduced. However, no franchisee should be under any illusion that he is not going to be exposed to business risk because he is under the umbrella of a franchisor. All business undertakings involve risk and a franchised business is no exception.

To be successful, the franchisee will still have to work hard, perhaps harder than he has ever done before. The franchisor will never be able to promise great rewards for little effort.

The blueprint for carrying on business successfully and profitably can rarely be a blueprint for carrying on a business successfully without working.

10. The franchisee should have the services of the field operational support staff of the franchisor who should be there to assist with any problems which may arise from time-to-time in the course of business.

11. The franchisee has the benefit of the use of the franchisor’s patents, trade marks, copyrights, trade secrets, and any secret processes or formulae.

12. The franchisee has the benefit of the franchisor’s continuous research and development programmes, which are designed to improve the business and keep it up-to-date and competitive.

13. The franchisor obtains the maximum amount of market information and experience which is available to be shared by all the franchisees in his system. This gives the franchisee information which would not otherwise be available to him because of its cost or inaccessibility. Indeed, all franchisees contribute to this common fund of knowledge and experience which is available to the whole of the network.

14. There are sometimes territorial guarantees in appropriate cases which protect a franchisee from competition from the franchisor and other franchisees of the franchise within a defined area around the franchisee’s business address and in the case of a mobile franchise, a defined area of operation. This will invariably involve issues under UK and EU competition laws, which make such guarantees difficult in some cases. This needs to be the subject of legal advice.

15. The recognition by the banks of the advantages of franchise financing have made lending sources and terms available to franchisees which are more attractive than those offered to non-franchised new businesses.

Disadvantages
1. Inevitably, the relationship between the franchisor and franchisee must involve the imposition of controls. These controls will regulate the quality of the service or products to be provided or sold by the franchisee to the consumer. It has been mentioned previously that the franchisee will own his own business. However, the business which he owns is one which he is licensed to carry out in accordance with the terms of his contract. He must accept that in return for the advantages enjoyed by him, by virtue of his association with the franchisor and all the other franchisees, control of quality and standards is essential.

Each bad franchisee has an adverse effect, not only on his own business, but indirectly on the whole of the franchised chain and as such, all other franchisees. The franchisor, will, therefore, impose standards and demand that they are maintained so that the maximum benefit is derived by its franchisee (and indirectly the whole of the franchised chain) from the operation of the franchisee’s business. This is what makes it necessary for a franchise agreement to have a one-sided look to it.

This is not to say that the franchisee will not be able to make any contribution, or to impose his own personality on his business. Most franchisors do encourage their franchisees to make contributions to the development of the business of the franchised chain which their individual talent and qualities permit.

2. The franchisee will have to pay the franchisor for the services provided and for the use of the system, i.e. the initial franchise fee and continuing franchise fees.

3. The prospective franchisee may find it difficult to assess the quality of the franchisor. This factor must be weighed very carefully by the potential franchisee for it can affect the franchisee in two ways. Firstly, the franchisor’s offer of a business-format package may well not amount to what it appears to be on the surface. Secondly, the franchisor may be unable to maintain the continuing services which the franchisee is likely to need in order to sustain his business.

4. The franchise contract will contain some restrictions against the sale or transfer of the franchised business. This is a clear inhibition of the franchisee’s ability to deal with his own business but, as with most of the restrictions, there is a proper reason for it. This provision is in the contract because the franchisor will have already been most meticulous in its choice of the franchisee as the original holder of the franchise for this particular outlet. Why then should it be any less meticulous in its approval of a replacement? Naturally, it will wish to be satisfied that any successor to the original franchisee is equally suitable for that purpose.

In practice, there is normally very little difficulty in the achievement of successful sales of franchised businesses. Some agreements provide for the payment of fees to the franchisor to cover the cost of dealing with applications and training the new, replacement franchisees. Also, if the franchisor introduces the purchaser, as can be the case, there will probably be a fee to be paid for the introduction.

5. The franchisee may find himself becoming too dependent upon the franchisor and fail to produce the personal drive which is necessary to build up a successful business and to take full advantage of the foundations for business development which the system provides. Some franchisees lose their perspective. They delude themselves into believing that the franchisor has a duty to be so concerned about their particular business as to ensure that it has a flow of customers and to provide a day-to-day involvement which is inconsistent with franchising as a concept.

6. The franchisor’s policies may affect the franchisee’s profitability. For example, the franchisor may wish to see its franchisee build up to a higher turnover (from which it gets its continuing franchise fee), while the franchisee may be more concerned with increasing his profitability, which does not always necessarily follow from increased turnover.

7. The franchisor may make mistakes in its policies. It may arrive at decisions relating to innovations in the business which turn out to be unsuccessful and detrimental to the franchisee. This is why franchisors are always urged to market test innovations thoroughly in their own company-owned outlets and to be able to demonstrate to franchisees the cost effectiveness of introducing new ideas.

8. The good name of the franchised business and its brand image may become less reputable for reasons beyond his own control.

Type of business
The position of the franchise in the market in which it trades is a vital consideration. You should not only look at the particular franchised business in relation to its own activities, but also make an assessment of the prospects for the overall industry or trade of which it forms a part. The franchise will either be dealing in goods or products, or the provision of services.

Make sure that the proposition has been well enough tested and for a long enough period of time for one to be satisfied that the market really exists and has long-term prospects.

Please do remember, and there is no apology for the repetition, one must not enter into self-employment and franchising if one is not prepared to risk losing all! No prospective franchisee should delude himself into believing that any franchisor guarantees his success and that he will underwrite a franchisee failure. The risk the franchisee runs is his. That risk must be fully understood and appreciated.

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