Advantages and Disadvantages Of Franchising

A. Advantages from the Franchisor’s point of view:
Financial: Franchising creates another source of income for the franchisor, through payment of franchise fees, royalty & levies in addition to the possibility of sourcing private label products to franchisees. This capital injection provides an improved cash flow, a higher return on investment and higher profits. Other financial benefits that the franchisor enjoys are reduced operating, distribution and advertising costs. Of course that also means more allocated funds for research and development. Additionally, there will always be economies of scale with regard to purchasing power.
Operational: The franchisor can have a smaller central organization when compared to developing and owning locations themselves. Franchising also means uniformity of procedures, which reflects on consistency, enhanced productivity levels and better quality. Effective quality control is another advantage of the franchise system. The franchisee is usually self motivated since he has invested much time and money in the business, which means working hard to bring in better organizational and monetary results. This also reflects on more satisfied customers and improved sales effectiveness.
Strategic: To the franchisor, franchising means the spreading of risks by multiplying the number of locations through other people’s investment. That means faster network expansion and a better opportunity to focus on changing market needs, which in its turn means reduced effect from competitors.
Administrative: With a smaller central organization, the business maintains a more cost effective labour force, reduction of key staff turnover and more effective recruitment.

B. Advantages from a Franchisee’s point of view:
Avoiding the unnecessary trial and error period in starting and operating a new business.
Lower financial risk, compared to other ventures, because investment costs are lower and profit margins are higher.
Business Format Franchising complete packages ensure a ready to go “turn-key” franchised unit.
Managing a small business whilst depending on the power of the franchisor company which has a bigger organization.
The franchisee has an opportunity to run a proven business concept with a successful operational track record.
The opportunity to learn the latest developments and changes in the local and global market from the franchisor and focus entirely on developing the sales revenues.
The benefit of operating under a recognized trade name/trademark, which can have better marketing results.
The franchisee has access to accumulated business experience and technical know-how in managing the business.
A unified store design which leverages the business reputation in marketing the concept.
Easier purchasing, storing, and product display systems.

C. Disadvantages from a Franchisor’s point of view:
Considerable capital allocation is required to build the franchise infrastructure and pilot operation. At the beginning of the franchise program, the franchisor is required to have the appropriate resources to recruit, train, and support franchisees.
At the beginning of the franchise program there is a broader risk that the trade name can be spoiled by misfits until such time the franchisor is capable of selecting the right candidate for the business.
There is a risk that franchisees exercise undue pressure over the franchisor in order to implement new policies and procedures.
The franchisor has to disclose confidential information to franchisees and this may constitute a risk to the business.

D. Disadvantages from a Franchisee’s pint of view:
The requirement to pay the franchise fees and royalty to the franchisor, which in some cases can be exaggerated.
The transfer of all goodwill built in the local market to the franchisor upon expiration or termination of the franchise contract.
The necessity of abiding by the franchisor’s operating systems, standards, policies and procedures.
Reduced corporate profit margin due to payment of royalties and levies.

By Nurul Hidayah, Sp.d