Franchising is an established and popular form of business. It can be successful for both the franchisor and the franchisee, but it also comes with disadvantages.

Franchises can enable an established business to expand relatively quickly and efficiently. Often a prospective franchisee will already have its own business in place. The franchisor can expand into that business without the cost and administration of setting up a new local business. Of course, much will depend on the suitability of the prospective franchisee’s business.

A significant disadvantage is that franchisors have to relinquish a degree of control of their own business. Although franchise agreements seek to govern and restrict the business and conduct of franchisees, this provides no guarantees for franchisors. In consequence, franchises require a degree of trust and confidence between the parties.

In addition, franchises involve the disclosure of the franchisor’s trade secrets, business know-how and confidential information, which carries a risk for the franchisor. Although franchise agreements can impose confidentiality obligations on the franchisee, again this provides no guarantees for franchisors.

Another advantage is that franchises can help expand and streamline the marketing, distribution and supply of the franchisor’s products and services at a local or territorial level. With franchisees motivated to increase turnover they can handle this in their area. This can free up the franchisor to focus on the wider strategies, and on any further expansion or consolidation of its business.

The corresponding disadvantage is that in order to protect its brand the franchisor must monitor the franchisee’s local activities, and step in or provide support where necessary. This can be a distraction and a drain on resources and manpower. Obviously much depends on the quality of the franchisee.

Generally, franchises enable a business to expand cost effectively, which frees up the franchisor’s working capital for other things. Franchises do, of course, burden the franchisor with certain costs, but these tend to be significantly less than the costs of the franchisor setting up business itself. The greater turnover of goods and services can sometimes enable the franchisor to secure discounts from its own suppliers, which can help keep overheads down.

However, because franchisees are entitled to a share of the profits they generate, these profits will not be available for the franchisor. A balance has to be struck between the cost savings and possible overhead reductions a franchise can bring against the reduction of profits the franchisor would otherwise have enjoyed. 

Prospective franchisors should note that the capabilities and skills they have developed owning and managing their own business will be different from those required to manage and control a franchisee. The franchisees will not be their employees, and will have an unfamiliar degree of autonomy that the franchisor will have to accommodate.

Finally, franchisors must recognise that franchises are ultimately operated by individuals. Despite these individuals not being the franchisor’s employees, they will nevertheless work closely with the franchisor, and will be representing the franchisor at a local or territorial level. One of the most important things for a prospective franchisor to consider before granting a franchise is whether it will be able to work with the individual in question, and whether it has trust and confidence in that individual to carry on its business as they wish.

If you would like to speak to a specialist on this matter, or need any assistance or advice on a franchising matter please do not hesitate to contact me on 01245 453829 or alternatively you can email me at alan.massenhove@birkettlong.co.uk.