What is Franchising? Advantages, Disadvantages

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What is Franchising?

Franchising is a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers (franchisees).

Franchising is an agreement or license between two legally independent parties which gives:

  • A person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)

  • The franchisee the right to market a product or service using the operating methods of the franchisor.

  • The franchisee the obligation to pay the franchisor fees for these rights

  • The franchisor the obligation to provide rights and support to franchisees

Advantages of Franchising

  • Owning a franchise allows you to go into business for yourself, but not by yourself.

  • A franchise provides franchisees with a certain level of independence where they can operate their business.

  • A franchise provides an established product or service which may already enjoy widespread brand-name recognition. This gives the franchisee the benefits of a pre-sold customer base which would ordinarily take years to establish.

  • A franchise increases your chances of business success because you are associating with proven products and methods.

Disadvantages of Franchising

  • The franchisee is not completely independent. Franchisees are required to operate their businesses according to the procedures and restrictions set forth by the franchisor in the franchisee agreement.

    These restrictions usually include the products or services which can be offered, pricing and geographic territory. For some people, this is the most serious disadvantage to becoming a franchisee.

  • In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees.

  • Franchisees must be careful to balance restrictions and support provided by the franchisor with their own ability to manage their business

  • A damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into an unforeseen problem.

  • The term (duration) of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination.

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