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Why Franchising is a Smart Business Solution?

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Franchising is a form of marketing and distribution in which the owner of a business system (the franchisor) grants to an individual or group of individuals (the franchisee) the right to run a business selling a product or providing a service using the franchisor’s business system. Franchisees are given permission to use the franchisor’s branding, trademarks, and identifying marks under specified guidelines. It is important for anyone deciding to start a business by becoming a franchisee to remember that in franchising the franchisee is bound to a partnership agreement with the franchisor for a defined period of time. The word “franchise” is of Anglo-French derivation—from franc, meaning free—and is used both as a noun and as a (transitive) verb. For the franchisor, use of a franchise system is an alternative business growth strategy, compared to expansion through corporate owned outlets or “chain stores”. Adopting a franchise system business growth strategy for the sale and distribution of goods and services minimizes the franchisor’s capital investment and liability risk.

A.  Advantages of franchising:

 

Less risk: In a nutshell, the greatest advantage of a franchise system is that it reduces risk of business failure. This is due to the fact that an ethical franchisor will have a tried, tested and proven business concept in the market place. It is a well-known fact that less than 7% of franchise owners fail within the first 3 years, as compared to over 90% of new business start-ups.

Competitive edge: Franchising enables a small businessman to compete with big businesses and a franchisee can take advantage of the economies of scale. All franchisees acting together can buy more cheaply and on better terms than an individual small business. Add to this the franchisor’s reputation in the industry, the franchisee can trade under a recognized brand and should have a distinct advantage over any independent small business competitor.

Training and Support: Through training imparted by the franchisor, the franchisee climbs a very steep learning curve in a shorted period of time, thereby increasing their chances of succeeding considerably. For example, someone who wishes to set up a dress hire business would find it very difficult to get the stock mix right at the outset.

Efficient growth: Opening the first unit of a business is costly and time consuming. Opening a second unit can be almost as difficult. When that burden is shared with another business owner, it makes the process more efficient and takes the onus off the initial business owner.

Access to capital: One of the biggest barriers to expansion for small business is the money it costs to expand. And while there are several business loan options, they don’t always pan out. Franchising your business will take some time and money on your end, but it also has the potential to make you a lot of money in the form of franchise fees.

Top franchise businesses/companies around the world

B.   Disadvantages of franchising:

 

Lack of independence: An important feature of franchising is that every aspect of the business format is defined and each outlet is operated strictly in agreement with this format. Not everyone would be happy to operate a business under such constraints and you must consider how well you can accept this aspect of the franchising system when looking for a franchise to buy.

  • Discipline: Buying (licensing) a franchise means working within a system in which there is little freedom or scope to be creative. Almost every aspect of operating the business is laid down in the manuals.
  • Franchisor Monitoring: Regular field staff monitoring visits are welcome initially, but as time passes you will feel able to do your own trouble-shooting and you may come to regard the franchisors interest as an intrusion – it is after all your business.
 

Inflexibility:

  • Responding to the market: Franchising tends to be an inflexible method of doing business as each franchisee is bound by the franchise contract to operate the business format in a certain way. This can make it difficult for a franchisor to introduce changes to the business format, refit outlets, or introduce new types of equipment. In some franchises it can be difficult for a franchisee to respond to new competition or to a change in the local market.
  • The job itself: What may seem an attractive challenge now could become boring after a few years so it is important that you choose a franchise to buy in which you will enjoy the work, or which has potential for growth.
 

Risk associated with franchisor performance: It is important to recognize that not all franchise businesses are soundly based or well run. In signing the franchise agreement, you are formally binding yourself to a particular franchisor and it is, therefore, vital to select one which is competent and ethical.

Loss of complete brand control: When a business owner opens an independent business, they maintain complete control over their brand and every decision that happens within the business. When a franchisor allows a franchisee to open a business under their brand, they’re giving away (actually, selling) some of the control over their small business branding. While the franchise agreement should contain strong stipulations and rules to guide the decisions made by the franchisee, your franchisees won’t be clones of you. They will think and act differently, and your brand could wind up suffering because of it.

C.     Conclusion:

A business is always successful when the motive is to solve a problem and when the business is providing the world with a solution, franchising a business can not only provide the solution to the problem in a restricted area but it can also help the people of different regions. In addition, there is the added manpower, resources and capital which will result in new ideas and innovations to improve different aspects of the business. Therefore, it does not only benefit the business where it decreases risk but also the public as more solutions are made accessible to them.

 The sheer size of franchising in terms of number of stores, revenue generated in the United States, and its significant portion of the U.S. GDP is evidence enough of its success. Franchising accounts for more than a third of the annual retail sales in the United States; clearly, it is a successful wealth-creating machine. The capital marketplace would simply not support this road to entrepreneurship if return on investment did not guarantee it. This segment is the first clear documentation of both franchisee and franchisor wealth creation.

 The debate is advanced in favor of our argument that franchising, for all the stakeholders, is entrepreneurial in nature and fact. Here, we’ve provided you with a large overview that by franchising the business and providing it with different dynamics can fulfill the promise of wealth creation. Overall franchising is a business opportunity that we would definitely suggest to any entrepreneur who is looking to expand their business or looking to get into a franchisee business. The numbers as well as the practical approach proves the same. The advantages outweigh the disadvantages to a great extent and it is a clear pathway to success if the approach is correct.

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