Franchising – Meaning | Advantages and Disadvantages

What is Franchising?

Franchising is a well-known business strategy. Franchising is a form of contractual agreement in which a franchisee (a retailer) enters into an agreement with a franchisor (a producer) to sell the goods and services for a specified fee or commission. The retailer through his outlet distributes the goods or services.

Franchising - Meaning, Advantages, Disadvantages

Franchising – Meaning, Advantages, Disadvantages

It brings together the title-holder of recognized merchandise with another business. This strategy can be opted by small businesses by having a brand name of a well-known company associated with it.

For small business who cannot afford for much finance and capital investment for a business startup, franchising will be beneficial. Buying a franchise can be a shortcut to success.

Advantages of buying a franchise

The following are some of the advantages of buying franchise.

1. Higher success Rate: When entrepreneurs buy a franchise, they buy an established concept that has been successful. Franchisees stand a much better chance of success than people who start independent businesses.

Today, Raymonds, being the world’s largest integrated producers of suiting fabrics provides franchise opportunities. An entrepreneur by becoming a franchisee of Raymonds will be able to sell the suiting fabrics at ease due to the well established name.

2. Assistance: When entrepreneurs buy a franchise; they get all the equipment, supplies and instruction or training needed to start the business.

3. Cost reduction: Franchisor can afford to buy in bulk and pass the savings to franchisees. Inventory and supplies will cost less than running an independent company. For example, running a courier company on own could be a difficult task. But by being a franchisee of Overnite Express, the franchisee can save money.

4. Star Power: Many well-known franchises have national brand-name recognition. Buying a franchise can be like buying a business with built-in customers. For example, buying a franchise of Aptech will help to attract customers easily.

5. Profits: A franchise business can be immensely profitable. The probability for a small business to succeed is high as they have the backup and support of well established big business enterprises.

6. Marketing assistance: When a business is associated with a franchisor then the big-business themselves help in corporate marketing of the goods of the small industry or business they are providing support for.

7. Staff training: The franchisor provides all the necessary training to the franchisee or small business staff and provides additional resources and decision-making capabilities to a small business.

Disadvantages of buying a franchise

The following are some of the disadvantages of buying franchise.

1. Control: Some franchisors exert a great degree of control. No decision can be taken by the franchisees without consulting the franchisor.

2. Ongoing Costs: Besides the original franchise fee, royalties, a percentage of franchise’s business revenue, will have to be paid to the franchisor each month.

3. Lack of Support: All franchisors do not offer the same degree of assistance in starting a business and operating it successfully. Assistance is provided only at the time of starting the business.

4. Expensive: Buying a well-known franchise is very expensive. Entrepreneurs must have the ability to arrange the necessary finance.

5. Time consuming: Lot of time is required while selecting a franchise. A complete and thorough research is required to select the right franchise and to determine whether it would work for the business or not.

6. Misunderstanding: Franchise is a complex procedure and disputes may arise between the franchisee and franchisor.