Franchise

Franchise: Characteristics

  • A franchise is a type of business arrangement where a franchisor grants the franchisee the rights to use their business concept and trademarks.
  • The franchisor provides the business model, along with branding, products, and operational support.
  • The franchisee pays an initial fee and ongoing royalties to the franchisor.
  • Franchises are independently owned and operated but must follow the established guidelines and standards of the franchisor.
  • Examples of franchises include McDonald’s, Subway, and Domino’s Pizza.

Franchise: Advantages

  • Brand recognition is one of the major advantages of a franchise, reducing the need for extensive marketing.
  • Franchisees benefit from the proven business model and operational systems provided by the franchisor.
  • Often, franchisors provide training and support, helping new franchise owners to succeed.
  • The franchisor may also offer assistance with site selection, layout design, staffing, and supply chain management.
  • A franchisee can take advantage of the franchisor’s buying power and relationships with suppliers, usually leading to reduced costs.

Franchise: Disadvantages

  • Franchisees have to pay ongoing royalties and possibly advertising fees, reducing their overall profits.
  • The franchisee’s independence is limited by the need to adhere to the franchisor’s standards and guidelines.
  • The franchisor has the power to terminate the franchise agreement if the franchisee does not meet specified standards.
  • Poor performance or negative publicity of other franchises under the same brand may impact the reputation of the franchisee’s outlet.
  • Franchisees may find it difficult to make changes to the business model to adapt to local tastes or market changes.

Franchise: Responsibilities

  • The franchisee must maintain the brand’s quality standards and business operations as established by the franchisor.
  • The franchisee is responsible for the day-to-day running of the business, including staffing, inventory management, and customer service.
  • Regular payments of the agreed royalties and potentially advertising fees must be made to the franchisor.
  • The franchisee must comply with all local, regional, and national business laws and regulations.
  • The franchise agreement usually places the burden of financial risk on the franchisee, including losses and liabilities.