Advantages of entering into a franchise agreement
The greatest benefit to a franchisee is the reduction in his risk of business failure. As an ethical franchisor should have proven the business concept in the marketplace prior to franchising by way of a pilot or other trading experience, most of the obvious problems should have been solved and, therefore, the risks to a franchisee minimised. It is statistically proven that far fewer franchisees fail within the first three years compared to over 90 per cent of other new business start-ups.
Economies of scale
Franchising enables a small businessman to compete effectively in the marketplace and take advantage of economies of scale. A franchised network can buy products on more favourable rates than an individual small businessman. This can offer a significant advantage over smaller independent competitors. In addition, the products, equipment, system, and services which should have been market tested will already have a degree of consumer acceptance.
The franchisee has access to quality training and assistance to establish his business from day one thereby avoiding many of the pitfalls and mistakes of the independent businessman setting up from scratch. The ongoing support and advice from the franchisor provides a valuable resource for franchisees often allowing them, for example, to do much better in a recession than other businesses.
A franchisee is often required to pay a contribution towards a central advertising fund administered by the franchisor. The pooling of the resources of other franchisees and any contribution from the franchisor allows a franchisee access to extensive advertising whether in his own territory or nationwide. This increases the brand awareness and usually the profitability of his business.
A franchisee can take advantage of the name and reputation which has been built up by the franchisor. This can reduce the lead time in making a business successful which in turn reduces the franchisee’s working capital requirements. Moreover, Finance is usually more readily available to franchisees than to those setting up in business on their own account. Most franchisors will have negotiated with one of the major lenders in the franchising industry certain rates upon which a franchisee can obtain finance and a ratio of loan to capital. In some of the more substantial franchised networks these rates can be extremely favourable.
As a result, a franchisee is often required to invest less of his capital because of the financiers willingness to assist as a result of the proven success of the franchised concept. Franchising also has the added benefit of being eligible for the government’s Enterprise Finance Guarantee scheme.
In many cases, franchisees are given exclusive territorial rights which effectively give them a monopoly over the area allocated in respect of doing business under the trade name.
Disadvantages of entering into a franchise agreement
Franchisees in essence perceive themselves as independent businessmen and owners of their own business. They are, however, subject to control and regulation by the franchisor in the form of the franchise agreement and operations manual which they will not necessarily welcome.
The more successful a franchisee, the more likely he is to find a franchisor’s instructions and controls frustrating. A franchisee could argue that were he to set up in business independently he would not be subject to the same type of restrictions. Whilst on the face of it this seems true, in practice independent small business owners are often restricted in other ways through commercial considerations.
Powerful customers and suppliers, strong local competition, and financial constraints all impose less obvious, but equally important, restraints.