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Advantages and Challenges of Franchising

Advantages for the Franchisor

Franchising one’s business is the key to rapid growth. By using other people’s money, time, and organization, you can significantly expand your business into its optimum size and maximum profitability.

1. Start-up Capital
In growing a business, raising enough capital always poses a problem. On the other hand, the capital needed to expand the business through franchising is provided by the franchisee.

2. Management
Trained and motivated management is an integral part of franchising. It is difficult to find and keep competent experienced managers who are necessary to expand a business. With franchisees, you have people who are well-trained in the franchise system and who are also very motivated because their capital is at stake.

3. Efficient
With the franchisee’s capital as an effective motivating factor, franchises tend to be better run, thus becoming more efficient and profitable than company-owned branches

4. Bulk Purchasing
Franchisors enjoy great buying power. With a large number of units, the company buys for the entire system and at great savings to the individual franchisees. This enhances profit margins and gives the franchisees a very strong advantage over its competitors.

5. Securing prime locations
As a franchising business grows, it begins to establish a reputation in the market of its size and success. As such, prime commercial centers would like to have popular and successful franchises in their areas, therefore making it much easier to secure viable locations as a franchisor than it would be for a non-franchise business.

6. Cooperative advertising
Franchisors can achieve market dominance through extensive advertising because the cost is spread among many franchise units. Through pooled resources from a large number of franchisees, top quality advertising materials give franchisors a competitive advantage.

7. Maximum income
Franchisors are assured of more profit as franchises generate revenue in a number of ways such as franchise fee; franchise royalties; equipment, supplies, service and materials sales; property rentals; and, rebates from vendors of equipment and supplies. These income-streams from franchisees equal big profit.

Advantages for the Franchisee

Franchise is a robust business model that allows tremendous success over other investment vehicles.

1. High success rate
A franchise is a business model based on proven ideas and implementation. As opposed to having to build a new business from scratch, a franchise business comes with a reduced calculated risk.

2. Recognized brand and trademark
A franchise offers a product or a service that has become a household name. The powerful brand names that your franchise carry will guarantee your success.

3. You are not alone
Franchisors discover and perfect operating and management efficiencies that they pass on to their franchisees. These powerful and superior training and coaching system offered by the franchisors are designed either to help a franchisee overcome his lack of experience in running a business, or polish an acquired business sense, all done with the intention to make the franchise a success.

4. Ease in financing / Re-saleability of the franchise
Financial help for businesses with established good reputation come easy. Businesses with high success rates get nods for loans from banks and financial institutions. Moreover, a good franchise is an appreciating asset, thus maintaining its re-saleability at all times.

5. Huge profit
Through the franchisors, obtaining lower-cost materials and supplies is possible. This benefit, coupled with the right marketing strategy, brand positioning, and growth of the customer base, could only translate to increase in sales and immense profit.

Challenges for the Franchisor

1. Franchise sales
Growth in franchising is of prime importance. There will always be variables that will thwart franchise sales effort, such as limited pool of people with ample resources. If your franchise system is not expanding, soon it will be out of business.

2. Control
Franchising entails a more extensive evaluating process of potential franchisees than hiring a direct employee would require. A franchisee, in a way, controls his unit, and to varying degrees runs it his way. Incompetent franchisees – including those who fail to adhere to the operating system and franchise agreement – can easily ruin a franchisor’s brand by providing inferior products or services.

Challenges for the Franchisee

1. Control
As franchising involves the use of a proven business expertise, trademark, knowledge and training, the franchisee is required to follow the system. Some franchisors impose on a certain degree of control that makes following the system difficult.

2. On-going costs
Aside from the franchise fee and royalty, franchisees pay a certain percentage of their franchises’ revenues to the franchisor each month. Additional fees for services provided, such as advertising costs, are also charged regularly to franchisees.

3. Failed expectations
Conflict may arise in a franchisor-franchisee relationship due to incompetence. Franchisors can destroy its franchisees by failing to give ample support or by squeezing them too aggressively for profits. On the other hand, franchisees who tend to be lax in adhering to franchise agreements create dents on the established system, later on creating damage to the business or the brand.

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