Pros & Cons

What are the advantages for a franchisee?
Franchisees purchase into a franchise system because of the perceived benefits from being associated with a franchisor’s business system and a network of other franchisees. Key benefits include:

  • franchisors will have a vested interest in the success of the franchisee
  • the business system and its place in the market should have been already tested
  • collective buying power
  • collective marketing and advertising
  • franchisor training and support

From the franchisee’s point of view, a franchise provides an opportunity to operate a business that has already been tried and tested, thus reducing the risk of starting a business from scratch. Statistically, franchised businesses tend to operate better than non-franchised business.

What are the disadvantages for a franchisee?
Whilst franchises have many advantages, at times there are also disadvantages which must be carefully considered by prospective franchisees before purchasing a franchise. Common disadvantages may include:

  • generally more expensive to purchase
  • more ongoing costs (eg. royalties paid to franchisor)
  • the franchise is only granted for a limited time
  • there is a lack of flexibility, as franchisees must follow the franchisor’s systems
  • the franchisor’s problems can become the franchisee’s problems
  • the franchisee is not in control of their business (there is a separation between ownership and control)

For a franchisee their franchise is like a cross between business ownership and employment. While this model works for some people, it may be difficult to handle for others.

What are the advantages for a franchisor?
Financial advantages are a key element of franchising for the franchisor. In essence, franchising creates an additional source of income for the franchisor and thus provides a constant source of cash flow. The franchisor will receive various payments in the form of franchise fees, royalty & levies. These payments can then be used for further research and development of the business.

A franchisor will also reap a number of operational advantages. Instead of opening and owning the same business over various locations, the franchisor will have one central unit of organisation operated by a group of people with a commitment to ensuring the success of the business. Franchising provides a system of structure and set procedures which enhance productivity, quality and cash flow. The smooth operation of the business also improves sales effectiveness and customer satisfaction.

By having a single unit to organise and manage, the franchisor is able to consider potential expansion options and focus on changing market needs. Additionally, a smaller unit to organise and maintain means a more cost effective labour force, such as reduction of key staff turnover and more effective recruitment.

One of the prime advantages of franchising for the franchisor is the ability to expand their business without having to do it all themselves.

What are the disadvantages for a franchisor?
Although there are many positives to franchising, the method is not without some limitations. One of the most obvious is that not all businesses are suitable for franchising opportunities. The franchisor needs to realistically evaluate the viability of the business in order to establish its suitability.

Other issues which may arise for a franchisor include:

  • Costs – to begin the franchise system, the franchisor requires a considerable amount of capital in order to build the franchise infrastructure and pilot operation
  • Finding franchisees – The franchisor has the task of finding suitable franchisees and needs the appropriate resources to recruit, train and support them
  • Managing franchisees – at times, the franchisor may feel pressured by the franchisees to amend and implement various policies and procedures