In this presentation, we will discuss about the importance and merits for giving franchise and becoming franchise, the various drawbacks of owning and giving franchise, and the different benefits obtained from franchisees, To know more about Welingkar School’s Distance Learning Program and courses offered, visit: http://www.welingkaronline.org/distance-learning/online-mba.html

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 co-
operation 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

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