Advantages and Disadvantages of a Franchisee in a Franchise Agreement

A franchise agreement is a legally enforceable contract between a franchisor and a franchisee. The contract outlines the expectations a franchisor has of the franchisee. Franchising is a popular method of expanding a business both in India as well as in other countries around the globe. A franchisee has the advantage of getting a reputed brand without incurring any expenditure but there are disadvantages associated with the franchisee as well. Let us see what are the advantages and disadvantages of a franchisee in a franchise agreement.

Advantages of a Franchisee

As a prudent and reasonable businessman, it is essential to weigh the pros and cons before entering into a venture or starting a business and it is the same with a Franchisee opening a franchise. Franchises are inherently equipped with certain appealing factors which act as advantages and influence the decision of a businessman to become a franchisee.

People Also Read This: Advantages and Disadvantages of Selling a Franchise

These benefits accruing to a franchisee are as follows:

• Minimal Industry experience is required to buy a franchise - Purchasing a franchise permits one to work in a profession in which they may or may not have prior experience, but might be interested in. Franchisors provide franchisees with substantial support and training in order to educate and help them comprehend their company’s business strategy.
• Brand Name, Recognition and associated benefits - Arguably, one of the most important advantages which a franchisee has is with respect to the brand name and recognition of the franchisors company. Most entrepreneurs and small-scale businessmen often find it extremely arduous or difficult to develop their brand name and get recognition in the market. This major hurdle is avoided to a large extent when the franchisee who in most cases is a small businessman utilizes the developed brand name of the franchisors company.
• Business Assistance, Support and established track record of Franchisor – Another major point which acts as an advantage for the franchisee is the assistance, support provided by the franchisor and the established track record of the franchisor’s company. Franchisees typically sign a contract with an experienced team, ideally with an established brand with established methods and resources to support and guide the franchisee in designing, opening, advertising, and operating a franchise.
• Lower Risk - The factor of risk is present in every business enterprise. This is true whether a business owner is starting their own company or buying a franchise. However, the risk is considerably lower when opening a franchise. The network developed by the franchisor is one of the reasons franchisees are exposed to lower risks than independent business owners.
• Economies of Scale - Through economies of scale, franchise systems can provide purchasing efficiencies. The franchisor or trusted suppliers will provide some or all of the required products to the franchisee. Bulk discounts are frequently available to franchisees. A franchisee has access to network of the franchises on a large scale and therefore, has the ability to acquire items in bulk at a reduced cost.

People Also Read This: Franchise Renewal: Process of Franchise Agreement Renewal

Disadvantages of a Franchisee

• Initial Investments and Costs incurred – Initial investments can vary greatly depending on the type of business. In addition to the initial investment, some franchisors may charge rent if you buy an existing store, handle marketing expenditures, pay management fees, recruitment fees, service fees, royalties, and so on. It can be a hefty investment, which might be a disadvantage for individuals just starting their entrepreneurial careers.
• Hampered Creativity and Restrictive regulations - Franchisees that want to explore, alter, or add to their company’s business strategy or brand face creative limits because franchises already have a predetermined brand. Because of the preset business model, there are also limitations on where the franchisee may operate, what products he/she can sell, and whose suppliers the franchisee can utilize.
• Financial Information is shared with Franchisor - A lack of privacy is another downside of franchising. The franchise agreement will almost certainly state that the franchisor has complete control over the franchise’s finances. Franchisees may view the absence of financial privacy as a drawback of owning a franchise.
• Limited Control and potential for conflict – Owing to the restrictive regulations and hampered creativity along being constantly supervised by the franchisor, a franchisee has limited control over his/her franchise. This may lead to a potential situation of conflict which is not preferred by most franchisors.

People Also Read This: Franchise Terms And Conditions In India

Hence, a franchise agreement has both benefits and disadvantages for a franchisee. It is best to get legal help before deciding to become a franchisee or sign a franchise agreement.