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Franchising: Advantages and Disadvantages!
📌Franchising Meaning:
Franchising is a method that organizations utilize to distribute their products and services via retail outlets owned by dealers or operators, known as a franchisee. The company that allows the independent third-party operator to sell its products and services using its name and techniques is the franchisor.
Franchising arrangement is a symbiotic one for the franchisor and the franchisee, nonetheless franchising is particularly beneficial for the franchisee.
Following are, for example, the distinct advantages that franchising provides to the franchisee:
(i) Franchising makes the task of getting started easier because the franchisee gets a business format- already market tested and found to work. Hence, buying a franchise is so far safer than trying to start a business.
(ii) It reduces chances for failure. Here, what is significant to mention is that fewer than 10 per cent of all franchise fail. In dramatic contrast with this is the fact that two out of every five entrepreneurs who start on their own fail within three years, and eight out of every ten fail within ten years.
(iii) A well-established franchise brings with it the very important advantage of recognition. Many new businesses experience lean months, or years, after start-up. Obviously, the longer the period the business must experience it, the greater the chances of failure. With the well-tested franchise, this period of agony may reduce to only weeks, or perhaps just days.
(iv) Franchising may increase the franchisee’s purchasing power also. Because, being part of a large and that too proprietor organization means paying less for a variety of things such as supplies equipment, inventory, services, insurance, and so on. It also can mean getting better service from suppliers because of the importance of the organisation (franchisor) of you (franchisee) is part.
(v) One gets the benefit of the franchisor’s research and development in improving the product.
(vi) The franchisee has the protected or privileged rights to franchise within a given area.
(vii) As compared with other forms of new business, the prospects of obtaining loan facilities from the banks and financial institutions in case of franchising are also improved.
In-spite of above benefits, franchising is not an unmixed blessing. There are some disadvantages as well associated with a franchise arrangement.
The main ones are listed as follows:
(i) Unlike entrepreneurs who start their own business, the franchisees find no room or scope for enjoying their creativity especially in case of ‘pure franchising.’ They have to work as per the business-format given by the franchisor. One classic example of regimentation in franchising can be found in the McDonald’s restaurant business-format.
A McDonald’s franchise is given very little operational latitude; indeed, the operations manual attends to such minor details as when to boil the bearings on the potato slicer. The purpose of these restrictions is not to frustrate the franchisees, but to ensure that each outlet is rim in a uniform, correct manner.
(ii) A number of restrictions are also imposed upon the franchisees. Restrictions may relate to remain confined to product line or a particular geographical location only.
(iii) Franchisees usually do not have the right to sell their businesses to the highest bidder or to leave it to a member of their family without approval from the franchisor.
(iv) Though the franchisee can build up goodwill for his or her business by his or her efforts, goodwill still remains the property of the franchisor.
(v) The franchisee may become subject to fail with the failure of the franchisor.
(vi) Another disadvantage franchisees face is that franchisors generally reserve the option to buy back an outlet upon termination of the contract. Many franchisees become vulnerable to this option. As such, they operate under the constant fear of, non-renewal of the franchise arrangement. Then, a question arises is that do these disadvantages mean that franchising is no longer a desirable way to go into small business? Certainly not. Franchising is a proven and complete business concept world-wide.
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