Advantages and disadvantages – franchise arrangements Essay

Advantages and disadvantages – franchise arrangements

A Franchisee is defined as a person who pays the initial fee and royalty for the right to do business under a franchisors name and system. (Franchise : Advantages and Disadvantages. 2006). A franchisor provides the trade mark and name. A contract binding the two parties is created as a franchise. A franchise thus brings together the owner of a branded product or idea with another who seeks to avail the goodwill of its brand name. The advantages and disadvantages for a franchisee are as given in succeeding paragraphs.

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Advantages.

·         The business is based on a concept or idea which has already proved successful and as a franchisee you are making a commitment based on a proven winner. (Franchise, 2006).

·         The recognized brand name and trade mark can be used to benefit.

·         Advertising and promotion is consolidated by the franchisor.

·         Training, assistance in setting up and business rules are provided by the franchisor, leading to ease of functioning.

·         Exclusive rights for the product in a geographic area enable monopoly.

·         Financing of a franchisee is easier as banks are more willing to lend to a known entity.

·         Risk is shared jointly by the franchise and franchisor.

·         The existing customer base can be exploited.

·         The existing supplier arrangement can be exploited.

Disadvantages

·         Costs may exceed the initial expectations as continuing royalty in addition to initial costs are expected to be paid. (Franchise, 2006).

·         The agreement at times restricts the way a business is run and alterations to suit local markets may not be permitted.

·         If the franchisor leaves the business or loses his focus, the overall impact will be felt by the franchisee as well.

·         The reputation is based on a number of franchisees, the quality of who is uncertain. Thus the business will get a bad name because of causes unrelated to the franchise’s own reputation.

·         Disposal of business cannot be carried out independently and has to be to a person approved by the franchisor as a result the best value may not be obtained.

·         Reduced risk also implies a reduction in profits.

References

Franchise. 2006. http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073791408Buy. (08 July 2006).
Franchise : Advantages and Disadvantages. 2006. http://www.residual-rewards.com/franchise.html. (8 July 2006).