Merits and demerits of Franchising. Chapter2

Transcription

1 Merits and demerits of Franchising Chapter2

2 Objectives The Importance and merits for giving franchise. The Importance and merits for becoming franchise. Key drawbacks of owning a franchise. Key drawbacks of giving a franchise. 2

3 Introduction The very concept of franchising is expansion of a business enterprise through a network of franchised units. Franchising offer multiple benefits of low capital expenditure, Personal commitment and motivation. Franchising benefits for Society, Franchisees, Franchisor 3

4 Franchisees benefits The trademark of the Franchise and the product sold appear to be valuable Franchisee is willing to pay something to sell these commodities. Franchisees business benefits from goodwill & brand name. 4

5 Franchisees benefits Franchisor often gives managerial advice to the Franchisees. Franchisees lack of basic or specialized knowledge and experience is overcome by training program. Earn profit without investing high capital 5

6 Franchisees benefits An experienced Franchisor is fully aware of what to do & what not to. There are many he requires to know about lest he may face unending problems. 6

7 Franchisees benefits The Franchisees will usually need less capital than he would set up a business independently. All leading banks offer special package to Franchisors worth a name than they would to small time dealer. 7

8 Franchisees benefits In a way the Franchisees become an entrepreneur and opens a business with substantial assistance. The Franchisees should have access to the Franchisors research and development department. 8

9 Franchisees benefits However no Franchisees should consider that because he is coming under the umbrella of the Franchisor,he is not going to expose any risk at all. What makes Franchise different from other business is it gains from Franchisor the entire business concept. 9

10 Franchisees benefits Advantages of Franchise ownership Overall competitive benefits The brand identification often provide new Franchisees with established customer base 10

11 Franchisees benefits Advantages of Franchise ownership Preopening benefits The Franchisors have learned from mistakes & advice new Franchisees not to repeat those. 11

12 Franchisees benefits Advantages of Franchise ownership Ongoing benefits In exchange for paying royalty Franchisees receive training program. Professionally designed point of sale created 12

13 Franchisors benefits The Franchisor can earn a reasonable profit without involving high capital risk. Expenses towards developing Franchisees are covered by frontend fees & royalty 13

14 Franchisors benefits The Franchisor is safe from the risk of financial loss in case a Franchisees unit fails to pick up. The Franchisor acquires the advantage of bulk buying facilities & payment terms. 14

15 Franchisors benefits The Franchisee invests money,time & effort in buying the Franchise She/he will become independent & self employed entrepreneur. 15

16 Franchisors benefits When a sub unit fares well,the Franchisor also earns more. The Franchisor is free from motivating managers, to fix targets for staff. 16

17 Franchisors benefits Reduced daily involvement The Franchisor provide all the business format to Franchise. The Franchise is responsible for day to day administration. 17

18 Franchisors benefits He will be able to carve out new strategy or think about innovative technology. Instant possession of a memorable name and status automatically lead to increased sales. 18

19 Demerits of Franchisee Just as two sides of coins there are certain drawbacks and short comings too. They are loss of ownership Lower profit Interdependence The Franchisor owns the business format, He controls whole activity. 19

20 Demerits of Franchisee Loss of ownership The Franchisor explains,discusses and places suggestions intend of commanding & instructing. Over the period Franchisee gains experience & his confidence gets boosted. He may start asking questions on certain policies 20

21 Demerits of Franchisee Lower profit Franchising to have certain teething problems. The finance crunch will be one of difficulties of a Franchisor Advertising and marketing become costly affair 21

22 Demerits of Franchisee Lower profit This low income coupled with initial negative cash flow may tempt a Franchisor to search for speedier and larger financial gain. Also asking higher rate of royalty may show an upward mobility of income but may end disaster later. 22

23 Demerits of Franchisee Interdependence The success of Franchisee has heavy dependence on mutual trust and cooperation between both partners. On the part of the franchisee,it become mandatory for him/her to follow laid down terms 23

24 Demerits of Franchisee Interdependence These measures would be definitely lead to a successful Franchise. On the other hand sticking to outdated policies will ruin the Franchisee leading to bankruptcy. 24

25 Demerits of Franchisee Hard work & Effort There goes a common belief that Franchising is easy way to get rich fast. It is easy reaching & negotiating for suitable property 25

26 Demerits of Franchisee Hard work & Effort It will be tedious and monotonous to keep the premises spick and span. Financial commitments will have to be made as per situation demands 26

27 Demerits of Franchisee Constant Payment After meeting the initial expenditure the Franchisee has to make regular royalty payments to the Franchisor This constant continued payment for a long period becomes an irritant for a Franchisee 27

28 Demerits of Franchisee Inflexible rules & Procedures The Franchisee is under obligation to operate strictly under guidelines laid in operations manual. The Franchisor checks up in every detail to ensure that procedures are religiously followed If found otherwise the Franchisee could be ousted by terminating agreement. 28

29 Demerits of Franchisee Inflexible rules & Procedures Apart from getting green signal from the Franchisor he has to bring the other Franchisee in the network in line. In case the Franchisee wants to wind up and sell the outgoing concern,the Franchisor can be obstacle. 29

30 Demerits of Franchisee Mutual Dependence The relationship between Franchisor and Franchisee is one of interdependence. They are dependent on each other to make business successful. They could be pulled up by media for mistreating their staff 30

31 Demerits for a Franchisor Disadvantages to a Franchisor Control & co-ordinate a network of semi- Independent businessmen. The policies and monitoring standards by the Franchisor is vital but can at times be difficult. 31

32 Demerits for a Franchisor Disadvantages to a Franchisor This may be personality clashes between Franchisee & members of Franchisor team. It will be quite apparent that a Franchise is no way agent or representative of a Franchisor 32

33 Demerits for a Franchisor Disadvantages to a Franchisee This Ongoing payments and strict protocols can be oppressive to aspiring entrepreneurs. While buying into a franchise can provide a more solid,established introduction to business world. 33

34 Demerits for a Franchisor Disadvantages to a Franchisee Expenses Buying into Franchise is not cheap The initial cost of Franchise can be 10to 12 lakhs or more Franchisee must pay ongoing royalties to the parent companies. 34

35 Demerits for a Franchisor Disadvantages to a Franchisee Expenses These payments can vary from standard rates to percentage of profit. The Franchisor may also require payments for training & other services. 35

36 Demerits for a Franchisor Disadvantages to a Franchisee Protocol Due to strict protocol established in contracts and operations manual there is little room for creativity. That rigidity ensures consistency among a firms Franchisee 36

37 Demerits for a Franchisor Disadvantages to a Franchisee Protocol Another potential drawback of owning a Franchise is that Franchisors places a number of restrictions on their Franchisee. These restriction can make a variety of forms including limitations on product. 37

38 Demerits for a Franchisor Disadvantages to a Franchisee Name association In a Franchise model,the name association is touted as tremendous benefit to starting entrepreneurs. Some companies try to make money by just collecting Franchise fees 38

39 Demerits for a Franchisor Disadvantages to a Franchisee Name association Name association is widely seen as one of the major benefits of Franchise ownership. The best protection against this is to make sure the Franchisor has a time tested and solid reputation within the industry. 39

40 Demerits for a Franchisor Disadvantages to a Franchisee Name association Main disadvantages is loss of control The Franchisee s reliance on the power of the Franchisor s brand may prove to be a disadvantage, if the Franchisor fall into dispute. 40

41 Demerits for a Franchisor Disadvantages to a Franchisee Limited Potential Automatic restriction on growth are a major drawback of franchising. Growth potential Franchised operation is limited by a couple of factors. 41

42 Demerits for a Franchisor Disadvantages to a Franchisee Limited Potential Another factor that limits the growth potential of Franchisee is Franchisees cannot Franchisee. Franchisee s business may suffer as a result of an error on part of Franchisor. 42

43 Demerits for a Franchisor Disadvantages to a Franchisee Obligation According to the International Franchise Association, the average length of a Franchise agreement in 2009 was 10.6 years. Franchised business tend to be highly specialized. 43

44 Demerits for a Franchisor Disadvantages to a Franchisee Obligation The Franchisee will not have the unfettered right to sell his business. The Franchisee may become over dependent on the support of the Franchisor. 44

45 Demerits for a Franchisor Disadvantages to a Franchisee No guarantee Usually there is no guarantee of financial success for the Franchisee. While the estimated startup costs of the Franchises are an implied earning claim. 45

46 Demerits for a Franchisor Disadvantages to a Franchisee Conflicts Franchisor/ Franchisee relationship can easily cause conflict if either side is incompetent. As a Franchisee,he has little legal source. 46

47 Summary Merits Franchisee The trademark of the Franchise and the product sold appear to be valuable Franchisee is willing to pay something to sell these commodities. Franchisees business benefits from goodwill & brand name. 47

48 Summary Merits Franchisee Franchisor often gives managerial advice to the Franchisees. Franchisees lack of basic or specialized knowledge and experience is overcome by training program. Earn profit without investing high capital 48

49 Summary Merits Franchisor The Franchisor can earn a reasonable profit without involving high capital risk. Expenses towards developing Franchisees are covered by frontend fees & royalty 49

50 Summary Merits The Franchisor is safe from the risk of financial loss in case a Franchisees unit fails to pick up. The Franchisor acquires the advantage of bulk buying facilities & payment terms. 50

51 Summary Demerits Franchisee They are loss of ownership Lower profit Interdependence 51

52 Summary Demerits Franchisor Control & co-ordinate a network of semi- Independent businessmen. The policies and monitoring standards by the Franchisor is vital but can at times be difficult. 52

53 Merits and demerits of Franchising End of Chapter2