What Are the Advantages & Disadvantages of Being a 'Franchise'?
Franchises represent a potentially lucrative opportunity for entrepreneurs and investors in many different markets. Franchises are structured with a central parent company that licenses individual owners to open branches of the franchise, using the same brand name but operating independently. Franchises offer the support of an established parent company but also place special requirements on franchisees.
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Licensing Costs
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Besides the standard operating costs, such as payroll, maintaining a location and buying supplies, a franchisee must pay an up-front licensing fee to the parent company. Franchise owners also pay a percentage of their monthly sales back to the parent company in exchange for business support and the right to use the parent company's name and business model. These are costs that don't exist for entrepreneurs who open their own businesses, meaning that a franchise functions with additional operational overhead.
Support
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Parent companies provide several types of support to individual franchise owners. Besides delivering a brand with name recognition, parent companies allow franchise owners to benefit from their marketing efforts. Owners can also use the parent company's business models, including product pricing, special offers and promotions. Parent companies use the licensing fees owners pay to fund national or regional marketing efforts that individual owners might not be able to afford on their own.
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Supplies
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Securing supplies for a business at a reasonable cost and with a consistent degree of quality is a challenge for any owner. Franchises offer large-scale supply chains that owners can tap into, receiving their goods at a reduced price when the parent company buys directly from suppliers in bulk quantities and ensuring that there is an adequate supply or products available at any given time. For example, a fast food franchise's parent company warehouse may be able to supply fresh ingredients year-round and at a much lower and more stable cost than what local producers or suppliers would charge when selling to a stand-alone restaurant.
Control
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A general lack of control is a drawback of the franchise model. Owners have flexibility in terms of managing their workforce and participating in local promotions, but the parent company usually regulates other activities. This may include standard pricing guidelines, customer service policies or a limited list of authorized products that franchise owners can sell. Parent companies use regulations and the option of revoking a franchisee's license to protect their image and ensure consistency across their brand.
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