Franchising is a type of licensing that grants access to a businesses proprietary knowledge and trademarks, allowing a franchisee to sell a product or service under the franchisor’s businesses name. In exchange for these rights the franchisee pays a licensing fee.
This is one of the best ways to increase reach in different geographical markets and is a low-cost way to increase sales and marketing.
Entrepreneurs from the most part choose to work on their idea for a startup, while this grants them freedom to decide and plan their execution and workings, it is to be kept in mind that most startups don’t make it past the first five years, if they do at all.
For people looking into entrepreneurship and not having a startup idea or for those who are looking for a formulated path, franchising might be a great idea to pursue.
While taking up a franchise does limit certain things, it also gives the benefit of buying into a successful company while being able to run a part of it.
Benefits for the Franchisee:
Assistance: while the goods are being sold under the business name, the franchisor will provide appropriate training, instructions and any help later on if required.
Customer Base: since the company name is already known, the franchisee has to do very little in terms of focusing on lead conversion.
Rate of Success: since the company already had a customer base and a well known name, there is a very small probability of failure, since you are joining into a business that is already successful.
Networking: joining a franchise gives you an opportunity to broaden your networks, as you will either meet or work with professionals in the same company, who will be able to impart wisdom and help in times of trouble.
Increased Profits: a franchisee not only gets profits from the main business but will also save because they will be able to buy material in bulk which will come in cheaper compared to a small business order. Moreover the business will bring in repeat customers or new customers in droves.
Benefits for the Franchisor:
Access to Capital: one of the biggest challenges a startup faces is the shortage of finances. Franchising your startup in an efficient way to increase funds, sales and rake in new customers while you save on marketing.
Growth: while the franchise will get in a certain amount of money every month without any direct intervention from the founder, they can now free up time to focus on other issues.
Decreased Supervision: the thing about managers is that they too need to be managed. Having a franchise, means that the franchisee is responsible for all the internal working of the local outlet. Which means that all the franchisor needs to do is check in once in a while for a regular report.
Brand Awareness: the local franchise will run on the marketing strategy of the parent company, but the founder will not have to make sure that the sales goals are hit every month or that the range of the marketing campaign is reached; all of this is handled by the franchisee.
Risk: since this is a partnership, there is a considerable reduction of risk. Both in terms of monetary funds and product development and expansion. As the franchisee too takes in on any liability that could occur.
Disadvantages for the Franchisee:
Control: while the franchisee is the boss, they do have to answer to the founder, and any decision to be made has to be run by the founder first.
Restrictions: there are certain restrictions in place like working hours, training and quality of work force, this is to maintain uniformity through the company and brand image. Moreover the franchisor will be able to oversee any department specifically if the need calls for it.
Investments: While the profits that are raked in are a fortune, the initial investment can be very costly, especially if the business is popular and very profitable. These costs can include royalty fees and advertising costs, among a few.
Disadvantages for the Franchisor:
Legal Disputes: if the contact agreed on is violated by any involved party, the lawsuit that follows is a very expensive affair and can take up years to come to a final verdict.
Control: since the franchisor will be selling the right of usage of the band name, they will have to partially give up control. While the founder will have to work within the rules and policies set, they will invariably have control of how the business is run internally.
Time Consumption: coming up with a franchising strategy will take time, especially getting it into a working model. The franchisor will also have to regularly check up on the local franchises and read through the regular reports coming in.
Building a business for the ground up can be very hard and time consuming, the most difficult part being building a customer base. Taking up a franchise does solve a part of the problem, all the while limiting certain aspects of the business.
As for the franchisor, it can be a great way to expand into new geographical territories, but there will be certain things within the business model that will have to change.
For any party, getting involved into a franchise model should be a matter of great thought. It is not an easy or convenient process in any way and will take great time, effort and resources to build a partnership of any sort.