|  Business Format Franchising
The term `franchising', which is borrowed from the French, originally meant being free from slavery. Today, business format franchising is the name given to a relationship in which the owner of a product, a process, or a service allows a local operator to set up a business under that name, for a specified period of time. The local operator (the franchisee) pays the parent organisation (the franchiser) an initial fee and, usually, continuing royalties for the privilege.
The franchiser lays down a blueprint on how the business should be operated, the content and nature of the goods and services being offered, the price and quality of these goods, and even the location, size and layout of any premises to be used. The franchiser also provides the franchisee with training and other back-up support, such as accounting systems, advertising programmes and personnel recruitment and selection advice.
In essence, franchising thrives because it merges the incentive of owning a business with the management skills of big business. And personal ownership is one of the best incentives yet created to spur hard work.
Franchising may benefit not only the franchisee but also the franchiser. For example, it may enable the franchiser to grow rapidly by using other people's (that is, the franchisee's) money. That is largely how giant franchisers like McDonald's and Baskin-Robbins have mushroomed into billion-dollar businesses in so short a time.
The idea that franchisees are independent business people is something of a myth. Franchisees generally are not free to run their business as they see fit. They are often hamstrung by the franchiser's policies, standards and procedures.
Franchise: Advantages and Disadvantages
Advantages
From the franchiser's point of view, the advantages are that he does not have any direct investment in an outlet bearing his name. The inventory and equipment are owned by the franchisee. Because of the shortage of prime sites, there is a growing trend for franchisers to acquire leases on behalf of franchisees, or at any rate to stand as guarantors. Nevertheless, the effect on the liquidity of the franchiser, in contrast to expansion by opening branches, is enormous-though if the franchiser does his job properly there are heavy start-up costs in piloting the franchise and in such aspects as training. Thereafter there are further costs in providing a continuing service to franchisees in such matters as research and development, promotion, administrative backup and feedback and communication within the network. The expectation is that these costs will be offset by the fact that the franchisee, as the owner of the business, is more likely to be highly motivated than an employee and more responsive to local market needs and conditions; that the franchiser receives an income from the franchise; and that, without direct financial involvement, he may in this way derive some of the benefits of expansion, in as much as franchising provides economies of scale from centralised purchasing and, where feasible, some degree of centralised administrative facilities.
Disadvantages
The disadvantages are that, although the failure of an individual franchise may reflect badly on the franchise operation as a whole, all the franchiser can control is the format itself and he can only influence the running of individual operations by pulling the reins. In extreme cases the franchiser may terminate the agreement or at any rate not renew it, but he cannot throw the franchisee out as if he were an employee. The franchiser is therefore dependent on the willingness of the franchisee to observe the rules and play the game. A failure to do so can be damaging to the franchiser and the franchisee as a whole.
Another disadvantage sometimes turns out to lie in the curious mixture of dependence and independence that franchising produces. The franchisee is encouraged to think of him as an independent business entity, and to a large extent this is indeed the situation. Nevertheless, he is operating the franchiser's business concept under a license for which a fee is payable. There are cases where franchisees identify so closely with the particular business they are running that they ultimately resent the payment of the fee. The success is felt to be due to the franchisee's own effort, not to the franchise concept or to the franchiser. This is apt to be particularly so if the franchiser adopts a lower profile than he should, either in terms of direct help or in matters such as national advertising. Clearly, of course, the franchisee would be obliged to pay under the terms of agreement, but a sour relationship is not good for either party, so it is up to the franchiser to maintain his part of the bargain both in letter and in spirit. Franchises are a matter of mutual interest and obligations. |
