What is Franchising?: Benefits and Limitations

Franchising is a means of marketing goods and services in which the franchiser grants the legal right to use branding, trademarks and products and the method of operation is transferred to third party- the franchisee- in return for a franchise fee. The franchiser provides assistance, training and help with sourcing components and exercises significant control over the franchisee’s method of operation.

It is considered to be relatively less risky business start-up for the franchisee but still harnesses the motivation, time and energy of the people who are investing their own capital in the business. For the franchiser it has a number of advantages, including the opportunity to build greater market coverage and obtain a steady, predictable stream of income without requiring excessive investment.

Franchising is a business model wherein an individual operates their own location of a larger, more established company. For Ex:- when you go to your local McDonald’s, KFC etc,.

Types of Franchising

Chan identifies two types of franchise. With Product/ Trade franchises, EX:- Car dealerships, Petrol service stations and soft drinks bottlers, the franchisees are granted the right to distribute a manufacturer’s product in a specified territory. Business format franchise is the growing sector and includes many types of businesses, including restaurants, convenience stores and hotels. This type of franchise includes the licensing of trademark and the system for operating the business and the appearance of the location.

Benefits of Franchising

1. Proven Market for the Product or Services: Except for newly established franchises, a known market exists for the franchiser’s product or service. Information about the performance of existing franchises is normally supplied or can be obtain by the franchisee. Such a trade record makes it much easier to make projections for future operations. This instant pulling power of the product also greatly helps the small business owner shorten the duration of the initial stage of the business when the market is being developed and resulting revenues are low.

2. Purchasing Advantages: Franchising company purchases large volumes of inventories for its franchisees, it can pass resulting cost savings on to the franchisees on purchases made from the franchiser.

3. Marketing and Management Benefits: One of the greatest advantages of choosing a franchising method of doing business is the opportunity to have access to the marketing and promotional image of the franchise business.

4. Quality Control Standards: Each franchisor imposes certain quality control standards on the franchisee. These standards allow the franchise system to achieve consistency and positive service or product uniformity throughout the entire system.

5. Less Operating Capital Requirement: Another major advantage for franchisees is that generally their start-up costs require less initial operating capital because of lower initial costs in starting the business.

6. Opportunities for Growth: Many franchisor provide new franchisees the opportunity to grow, not just with the initial franchise unit, but also by later on purchasing additional franchise locations.

Limitations of Franchising

  1. Lack of Independence.
  2. Cost of the Franchise.
  3. Restrictions of the Contract.
  4. Lack of Security.
  5. Cost of Merchandise.