Advantages
For franchisors
Expansion : Franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain in the process. After the brand and formula are carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their franchisees, and can earn profits commensurate with their contribution to those societies while greatly reducing the risk and expense that would be inherent in conventional chain operations. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network.- Legal considerations to consider : The franchisor is relieved of many of the mundane duties necessary to start a new outlet, such as obtaining the necessary licenses and permits. In some jurisdictions, certain permits (especially alcohol licenses) are more easily obtained by locally based, owner-operator type applicants while companies based outside the jurisdiction (and especially if they originate in another country) find it difficult if not impossible to get such licences issued to them directly. For this reason, hotel and restaurant chains that sell alcohol often have no viable option but to franchise if they wish to expand to another state or province. Additionally, the franchisor is relieved of the obligation to carry liability insurance on the independently owned franchise units that produce the gross sales of the franchised system because this is the obligation and responsibility of the franchisees under the franchise agreement. As long as the franchisor's operational manuals are efficient and followed by the franchisees, the franchisors are generally almost always protected from any liability for any incident that occurs on the property of the franchisee.
- Franchisors can sell franchises without making any representations as to success or failure of the units in the written franchise disclosure documents and in the written franchise agreements. Therefore, franchisors are generally protected from lawsuits from their franchisee because of the non-negotiable contracts that require franchisees to acknowledge, in effect, that they are buying the franchise knowing that there is risk, and that they have not been promised success or profits by the franchisor.
- Operational considerations : Franchisees are said to have a greater incentive than direct employees to operate their businesses successfully because they have a direct stake in the start up of the branded business and the tangible assets that wear the brand name. The need of franchisors to closely scrutinize the day to day operations of franchisees (compared to directly-owned outlets) is greatly reduced.
- Franchisors can maximize their profits on the gross sales of the franchisees and avoid the operational expenses for the physical units that wear their brand names. Franchisors can minimize their risk and thus increase their profits because their franchisees bear the expense of operating the units and the expense of being employers, in compliance with existing city, state, and federal laws.
For franchisees
- Employment : Opening a franchise is a way of owning a business.
- Quick start : As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turnkey business: from site selection to lease negotiation, training, mentoring and ongoing support as well as statutory requirements and troubleshooting.
- Expansion : With the help of the expertise provided by the franchisors, the franchisees may be able to take their franchised businesses to a level which they wouldn't have been able to without the expert guidance of their franchisors.
- Training : Franchisors often offer franchisees significant training, which is not available for free to individuals starting their own business. Although training is not always free for franchisees, it is sometimes supported through the traditional franchise fee that the franchisor collects and tailored to the business that is being started. When training fees and travel expenses, etc.. are required beyond the initial franchise fee, these fees are deductible as part of the startup expenses of the business.
- Many franchisors nowadays also have an online Corporate University to help franchisees with both initial and ongoing training. An online Corporate University has the advantage of enabling anytime, anywhere learning and is generally made available free of charge to the franchisee.
Disadvantages
For franchisors
- Control : successful franchising necessitates a much more careful vetting process when evaluating the limited number of potential franchisees than would be required in the hiring of direct employees who may have experience in the concept sector. An incompetent manager of a directly-owned outlet can easily be replaced, while, regardless of the local laws and agreements in place, removing an incompetent franchisee who owns the tangible assets of the business is much more difficult. Incompetent franchisees can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services. If a franchisee is cited for legal violations, (s)he will probably face the legal consequences alone but the franchisor's reputation could still be damaged.
For franchisees
- No guarantee : Usually, there is no guarantee of financial success for the franchisee made by the franchisor in the written disclosure circular and the actual franchise agreement. While the estimated startup costs of the franchise are an implied "earnings claim" some businesses do fail, including franchised outlets. Unfortunately, the unit financial performance statistics are not required to be disclosed to new buyers of franchises under Federal Regulatory Policy, the FTC Rule, and this omission makes it impossible for new buyers of franchises to assess the odds of success and failure of their investment in the franchise in terms of profitability and failure as experienced on a unit basis of the franchise system. (See article in American Business Law Journal, 1 January 2003, entitled Franchising Fraud: the continuing need for reform, 1 January 2003, published on the Internet in mid 2008.)
- Control : For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different. The United States Office of Advocacy of the SBA indicates that a franchisee "is merely a temporary business investment where he may be one of several investors during the lifetime of the franchise. In other words, he is "renting or leasing" the opportunity, not "buying a business for the purpose of true ownership." Additionally, "A franchise purchase consists of both intrinsic value and time value. A franchise is a wasting asset due to the finite term: the franchisor is only obliged to renew the franchise if it chooses to contract for that obligation."
- Price : Starting and operating a franchise business carries expenses. In choosing to adopt the standards set by the franchisor, the franchisee often has no further choice as to signage, shop fitting, uniforms etc. The franchisee may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The contract may also bind the franchisee to such alterations as demanded by the franchisor from time to time. (As required to be disclosed in the state disclosure document and the franchise agreement under the FTC Franchise Rule)
- Conflicts : The franchisor/franchisee relationship can easily cause conflict if either side is incompetent (or acting in bad faith). An incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits. Franchise agreements are unilateral contracts or contracts of adhesion wherein the contract terms generally are advantageous to the franchisor when there is conflict in the relationship. Additionally, the legal publishing website Nolo.com listed the "Lack of Legal Recourse" as one of Ten Good Reasons Not to Buy a Franchise:
“As a franchisee, you have little legal recourse if you're wronged by the franchisor. Most franchisors make franchisees sign agreements waiving their rights under federal and state law, and in some cases allowing the franchisor to choose where and under what law any dispute would be litigated. Shamefully, the Federal Trade Commission (FTC) investigates only a small minority of the franchise-related complaints it receives."
Source : wikipedia
