Advantages and disadvantages – franchise arrangements
A Franchisee is defined as a person who pays the initial fee and royalty for the right to do business under a franchisors name and system. (Franchise : Advantages and Disadvantages. 2006). A franchisor provides the trade mark and name. A contract binding the two parties is created as a franchise. A franchise thus brings together the owner of a branded product or idea with another who seeks to avail the goodwill of its brand name. The advantages and disadvantages for a franchisee are as given in succeeding paragraphs.
· The business is based on a concept or idea which has already proved successful and as a franchisee you are making a commitment based on a proven winner. (Franchise, 2006).
· The recognized brand name and trade mark can be used to benefit.
· Advertising and promotion is consolidated by the franchisor.
· Training, assistance in setting up and business rules are provided by the franchisor, leading to ease of functioning.
· Exclusive rights for the product in a geographic area enable monopoly.
· Financing of a franchisee is easier as banks are more willing to lend to a known entity.
· Risk is shared jointly by the franchise and franchisor.
· The existing customer base can be exploited.
· The existing supplier arrangement can be exploited.
· Costs may exceed the initial expectations as continuing royalty in addition to initial costs are expected to be paid. (Franchise, 2006).
· The agreement at times restricts the way a business is run and alterations to suit local markets may not be permitted.
· If the franchisor leaves the business or loses his focus, the overall impact will be felt by the franchisee as well.
· The reputation is based on a number of franchisees, the quality of who is uncertain. Thus the business will get a bad name because of causes unrelated to the franchise’s own reputation.
· Disposal of business cannot be carried out independently and has to be to a person approved by the franchisor as a result the best value may not be obtained.
· Reduced risk also implies a reduction in profits.
Franchise. 2006. http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073791408Buy. (08 July 2006).
Franchise : Advantages and Disadvantages. 2006. http://www.residual-rewards.com/franchise.html. (8 July 2006).