Advantages and disadvantages of franchising

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Advantages and disadvantages of franchising

Before we start talking about advantages and disadvantages of franchising, let us first look into the definitions of franchising. Franchising refers to ‘the granting of the right by a parent company (the franchisor) to another, independent entity (the franchisee) to do business in a prescribed manner’ (Czinkota, et. al 1992, p.278).

According to International Franchise Association (n.d.) franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship. Franchisors give franchisees the right to undertake business in a specified manner under the franchisors’ name in return for a royalty payment.

Examples of Franchise

According to Business Insider as cited in Heiligenstein (2019), the top 10 franchises in the world are as follows: Anytime Fitness, 7-11, Subway, Pizza Hut, Auntie Anne’s, KFC, McDonald’s, GNC, Circle K, and Papa John’s Pizza.

Advantages of franchising

There are a number of advantages of franchising from the perspectives of both franchisors and franchisees. Franchisors retain a lot of control in the business, and make substantial financial gains in terms of initial deposit and subsequent royalty payments they receive from the franchisees.

Another advantage for franchisors is that franchising is a rapid growth method. Therefore, franchisors can grow their business faster because franchisees are usually very motivated and put a lot of efforts to make the business successful.

On the other hand, the franchisees also have a lot of advantages. For example, imagine that you are a McDonald’s franchisee. As a franchisee, you benefit from a brand name that is recognised worldwide. Consequently, the risk of business failure is significantly reduced.

Often you do not need prior experience to be a franchisee. The franchisor will train you and ensure that you have right knowledge and skills to operate the franchise. In addition, you will receive continuous support from the franchisor.

Disadvantages of franchising

There are a number of disadvantages of franchising for franchisors. For example, the franchisees may gain substantial knowledge of how to do the business and subsequently run their own and independent business (Czinkota, et. al 1992). Likewise, franchisees are independent, and therefore, franchisors cannot manage them as closely as their own employees.

On the other hand, as a franchisee you have a number of disadvantages as well. For example, the franchisor will determine how you can run the business. Therefore, you have very little room to apply your own creativity in the business.

You may also suffer from chain effect. For example, if one franchisee draws negative media attention, or performs really bad, this may have knock-on effects on the entire chain. In addition, you have to share profits with the franchisor. Usually, a fixed percentage of the total profit you make in a year will go to the franchisor.

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Last update: 14 May 2019

References:

Czinkota, M., Rivoli, P., & Ronkainen, I. (1992) International Business, 2nd edition, USA: The Dryden Press

Heiligenstein, M. (2019) What is a franchise? Available at: https://fitsmallbusiness.com/what-is-a-franchise/ (accessed 14 May 2019)

International Franchise Association (n.d.) What is a Franchise, available at: https://www.franchise.org/what-is-a-franchise (Accessed 26 May 2018)

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Author: M Rahman

M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He is a graduate of Leeds Metropolitan University and London South Bank University.