Advantages and Disadvantages of Franchising for the Franchisor
Agreement & Contract

Advantages and Disadvantages of Franchising for the Franchisor

There are advantages and disadvantages of franchising for the franchisor whenever they are involved in expanding their business. These points are mentioned below.

Advantages of Franchising to the Franchisor

Growth- Unlike opening additional stores the organic way, where an owner invests their capital, franchising allows businesses to scale by selling franchise opportunities. It also helps establish a relationship between franchisor and franchisee, which helps run the business smoothly.

Capital- Franchising reduces the financial stress directly related to the growth, expansion, and establishment of a business. After paying an initial fee to join the network, franchisee invest their own money to develop an additional branch of the business.

Supply chain- As the franchisee opens a new spot at a new location, which in some cases is very remote, the reach of the business grows without requiring much effort from the owner.

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Disadvantages of Franchising to the Franchisor

Per-unit contribution- It should be specified in a franchising agreement that the franchisor does not profit from every penny the franchisee earns. In other words, the franchisee's revenue is a fraction of what the franchisor could earn if it owned and operated the franchise unit directly.

If the franchise is successful in and of itself, the company may need to sell four or five more franchises to achieve the same financial results.

Litigation risk- Litigation can also affect franchisors. Litigation is ingrained in Popular society, for better or worse, and the threat of being sued must be taken seriously. The most prominent example is McDonald's, which faced a multimillion-dollar lawsuit over the temperature of their coffee.

The danger of litigation can be reduced to some extent by establishing a good contractual agreement. These agreements enable the franchisor protect itself against workplace injuries, consumer "slip and fall" incidents, and employment liability such as harassment, wrongful termination, and so on.

Cost- Although franchising is a comparatively low-cost expansion method, it is not free. Business plan creation and finance analysis are two key feesthat a franchisor can expect to face. Creating a franchise operations handbook for the franchisee includes quality control papers, systems, and processes. Plans for marketing and other related materials.Employees are being educated on the franchising process. Negotiating third-party vendor agreements on behalf of the franchisee.

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Advantages and Disadvantages of Being a Franchisor

Advantages:

  • Franchising is a legal business model for expanding and growing your company. Franchising, when done effectively, allows you to expand your business and brand by recruiting and qualifying franchisee partners. Franchising lets you to expand more quickly.
  • You will benefit as a franchisor from a growing and more diverse revenue source. That is, you will get recurring earnings in the form of royalties as your franchisees open their own franchised sites.
  • By expanding your system, you'll be able to produce additional negotiation power and economies of scale with important suppliers as your franchisees grow. Franchisees may also contribute to marketing and brand development money, depending on how your franchise system is set up, allowing you to better promote and expand your brand with consumers.
  • You will be utilising and monetizing the value of your brand, business infrastructure, and know-how as a franchisor. These "business" assets will be employed by your franchisees, who will be contributing their own financial and managerial efforts in building their franchised sites and your brand, rather than only supporting your corporate location.

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Disadvantages:

  • Franchising is a regulated industry, and you must ensure that you follow all franchise laws before providing or selling franchises. There are benefits to franchising if you follow the franchising laws, but if you don't do it correctly, you incur regulatory and legal risk.
  • Franchising, like any other business expansion plan, necessitates capital and your participation in the development of a franchise system as well as compliance with regulatory requirements. Unfortunately, there are no shortcuts, and any imagined shortcut will almost always lead to franchising risk.
  • "franchise vultures," refers to a wide range of potential vendors, including ad agencies, SEO firms, franchise lawyers, public relations firms, so-called franchise development firms, and others who are interested in selling you a package of services without a genuine belief that you'll be on the right track for franchise system growth. The aim is to know who you're dealing with and make sure your franchise development objectives are realistic. As well as client referrals.