Pros and cons of franchising

Franchising is one of the leading business models embraced by a large number of brands worldwide including food and fashion brands as well as businesses in several more industries. There are several advantages of franchising for both franchisor and franchisee. However, just as there are advantages of franchising for businesses, there are some inherent risks too. Fast food brands like Subway, McDonald’s, Burger King, Dominos and KFC have adopted and used this business model successfully to find faster growth in the global market. On the one hand, franchising can help you build cost efficiency, find faster growth and expand your market as well as achieve economies of scale, on the other, there are some cons of franchising as well in terms of business strategy and marketing as well as operational efficiency. Moreover, franchising is not always the solution and sometimes you may need to take the risk of acquiring the capital to expand your business. In the fast-food industry mainly, you will come across several successful examples of the franchising model. To be successful in your franchising business, you need to take note of all the involved risks for effective operations and profitable growth.

Leading Advantages or Pros of Franchising for the franchisor:

Lower need for capital:

Often market expansion can be difficult for lack of capital. Expanding is easier through franchising. Franchising is an attractive alternative for capital acquisition and offers several advantages for the franchisor. A franchisor who wants to expand at a large scale faster can easily do so without the risk of debt or cost of equity. A company can use others’ resources to find faster growth since it is the franchisee who will pay for the opening and operation of a unit. In this way, the franchisor can expand using others’ capital and resources without any burden of debt. A franchisor must have a business plan, branding strategy, and a product or service as well as easy access to raw material. All the capital-related risks are minimized in the case of franchising.  So, the need for capital remains limited mainly to building and growing the franchising company and its operations. That is not going to cost you much.

As a franchisor, you do not need to buy or lease additional physical infrastructure or enter into any legal contracts since it will all be done by the franchisees. So, capital-related risks are not just small but bare minimum in the case of franchising when compared to the company owned and operated business models. There are no major contingent liabilities for the franchisors either which brings the risks lower. If brands like Subway, Burger King and McDonald’s are successful then it is because they had an excellent value proposition and business strategy. Another important area where your risks and the need for capital investment is minimized is human resources. You do not need to hire too many people to run your business but only a central management team and once you have expanded and your profits grow, you can enlarge your team. However, the need arises only when the number of franchise units has grown large. You may provide the training and other resources required to run the business but that’s all about it. There is no need to look for talented managers to operate each unit separately. 

Faster growth:

Acquiring faster growth can be easier with franchising. Finding growth is easier with an innovative idea since you will find it easier to secure support for your idea. However, if you want to expand fast and secure market share then you must use the franchising model since opening units and securing capital may take time but can be achieved faster with the support of franchisees. By using franchisees, you will be able to grow the chain faster as compared to other business models where you will have to shoulder the costs of opening and running each new outlet and this will require both time and money. In this way, you can compete with large businesses and once the number of franchisees has grown, you will have acquired size and scale which might be sufficient to beat a larger business that may be trying to compete with yours.

Operational Efficiency:

Franchising also brings additional operational efficiency. Managing the operations of each of the units becomes the responsibility of the franchisees who take care of their respective units at their own level and you can leverage their efficiency to gain market share. It means you can achieve higher scale in no time while also running a very lean organization but with the power of a large one.

Lower risk of business failure:

The risks of business failure are a lot less when you leverage the franchising model to expand market share. Since you do not have to mind the problems related to capital and human resources, you can spend your time planning, looking for suppliers and developing your product/service further or doing market research. There are other factors that also minimize the risk of failure. Each franchise is a link in the chain and utilizing the power of the entire chain, you can grow your business and its influence faster like Subway did. Since the risks related to staffing and capital are minimum, you are also able to focus your time and efforts on eliminating other risks and doing marketing.

Higher profitability:

In the franchising business model, you are not investing in the growth of your brand but it is done by the franchisees who will pay you the fees including advertising fees. Your operational and other expenses are low and franchisees also pay for the marketing of the brand. As your franchise grows famous or starts attracting more customers and higher profits, it will attract more franchisees. With growing influence, you will have higher bargaining power. Later, you can also increase the fees suitably. Even if the earnings are lower than the company-owned business model, you will not be incurring the expenses of hiring thousands of workers and maintaining a large physical infrastructure. In this way, you may end up having a very large net income.

Leading Advantages or Pros of Franchising for the franchisees:

Lower risk of failure:

For franchisees also, the risks of failure in the franchising business model are much lower compared to starting their own business. While you are running someone else’s business but generally you have a lot of independence related to operations and on key decisions as well. Moreover, the franchisor provides you the know-how and access to the raw material for making and selling products. Starting your own business can be comparatively riskier. It is also generally easier to get loans when you are applying for a franchise. Moreover, if you get the franchise of a famous and profitable brand, your profits can be higher than when you are running your own business. You will start earning profits quicker compared to launching your own business. There is a large initial investment but you might be able to retrieve it quickly if you have bought the franchise of famous business.

Established brand name:

When you are running a franchise, you are gaining the additional support that comes with an established brand name. In contrast, when you start your own business, it takes time to establish the brand and that can prove more capital intensive. Moreover, you do not have to focus exclusively on customer acquisition since acquiring customers becomes easier with a franchise.  The stronger the reputation of your franchisor, the more profitable is your business. So, while you may incur small fees related to marketing, it is the franchisor who will take care of the marketing mostly. So, the costs that come with marketing and promotions on a large scale when you are trying to establish a new business are not there in franchising. 

No need for experience:

You do not need any kind of work experience to run a franchise. Apart from that, you do not need any major technical expertise since you can hire people to do all that stuff and mostly the franchisor will provide all the training and knowhow to run the franchise. It makes running a franchise easier. So, even if you do not know much about the field, you can still enter into a  franchise. If you are buying the franchise for a fashion store or restaurant chain, it is not necessary that you have experience of running a clothing business or a restaurant. You just need the capital and resources required to start the franchise business.

Established Supply chain:

When you enter a franchise business, you do not need to establish your own supply chain,  but instead, the franchisor will ensure that you have access to the required raw material. If there is a particular raw material that is not easily accessible, the franchisor will try to find new sources from which it can be procured. Most large franchisors have established supply chains from which they procure raw material.

Leading Disadvantages or Cons of franchising for the franchisor:

Limited Independence:

Just as there are several advantages of franchising, there are some cons as well. A franchisor shares authority with his franchisees who operate his business. In such a  model, establishing the right quality control mechanisms is also essential since you need to maintain your quality standards if you do not want to lose reputation and customers. In terms of operations and decision making also you do not enjoy as much freedom as a franchisor as when you operate your own business. In some areas, you may be required to make a few sacrifices. That limits the amount of flexibility with regard to business strategy and marketing for the franchisors.

Quality management related issues:

Managing quality requires establishing strong quality control standards and continuous monitoring. Some of your franchisees may find it intrusive. However, if your franchisees do not pay the same attention to quality as you then the reputation of your business may be at risk. Systemwide quality control measures are an important requirement for running a franchise successfully.

Leading disadvantages or cons of franchising for the franchisees:

Intrusive actions or controls by the franchisor:

A franchise business is not as easy to operate as it may appear. There are some hidden complexities associated with franchising as well. You do not necessarily get the same independence as you have when you are running your own business. Sometimes, a franchisor may become too intrusive or watchful of your operations limiting the level of liberty you have in terms of making important decisions. 

Sharing a large part of the profits with franchisor:

When you are operating a franchise, you are also sharing a significant part of the profits with the franchisor. When you own a business, all the profits are yours but this is not the case with franchising. Moreover, a franchise business is not everyone’s curry and you need to watch for certain things on your own level to avoid losses. Apart from the competition at the local level, the local market conditions, as well as your staff, are your worries to a large extent.

Share the results of actions by other franchisees:

When you are operating a franchise business, you are the part of a larger system. You will be treated just like any other link in the chain. So, you will also bear the results of the actions of other franchisees partly. It is the era of social media and any negative news spreads like wildfire. So, if other franchisees do not adhere to the quality standards or hurt the reputation of the brand by their actions, the entire chain is affected and you too may end up losing sales. In this way, a franchising business is not as free from liabilities either.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.