Franchise and their Advantages & Disadvantages | A Level Notes Business 9609



It is a business in which exclusive rights are purchased for selling goods or services under a specified trade name and within a specified geographical area. The franchisor, who sells these rights, is entitled to an initial fee coupled with a percentage royalty, to be paid by the franchisee, who has been authorised to use the company‟s registered name and logo. The continuing growth of franchising has encouraged firms representing different industries to enter into such agreements, e.g., telecommunication (Telenor), clothing (Nike) and foodstuff (McDonald‟s).

Advantages to franchisor:

The main advantage of franchising out a business is that it facilitates rapid expansion without incurring the high capital cost of direct ownership of businesses within the chain. A nationwide presence can be

accomplished without heavy investment. The franchisor is also able to reduce the running costs, specially in the case of wages, raw material and administration. The franchisee will finance most of the expansion of the chain. The franchisor benefits from the efforts of committed, enthusiastic frachisees. They usually have local knowledge which proves to be beneficial in the expansion of the franchise.

Disadvantages to franchisor:

Franchisees are self-employed and there may be problems in ensuring they all adhere to the operational methods which are designed to achieve uniformity. Failure by an individual franchisee will reflect badly on the whole franchise operation. The franchisee might have different objectives from those of the franchisor. In the long run, they may begin to resent the control exercised by the franchisor. As a result, a franchisee may resort to some unethical or illegal practices such as under-declaration of sales.

Advantages to the franchisee:

The advantages to the franchisee are derived from the fact that the franchise involves the purchase of a tried and tested business format. He can benefit from the introduction and sale of ready-made product as well as a recognised name known to both customers and suppliers. Moreover, it is the responsibility of the franchisor to launch a promotional campaign for the product which will be in the interest of all the franchisees. The franchisee is entitled to advice, assistance and training services, to be rendered by the franchisor. Sometimes, loan facilities are also extended by the franchisor to the franchisee.

Disadvantages to the franchisee: The franchisor exerts considerable control over the franchisee. This limits the franchisee‟s freedom of action in terms of product, price, terms of sales, place and the termination of the business. Furthermore, the franchisee, in addition to the payment of initial fee and the royalty, is also supposed to buy inputs from the franchisor, which mat place an extra burden on his financial resources
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