Hamilton Pratt

Commerical Aspects

Background

Almost any type of business is capable of being franchised although some businesses do not lend themselves to franchising.  These are:

  • “people” businesses such as advertising or design agencies where training is less important than individual flair;
  • highly technical businesses which cannot be  easily taught;
  • businesses with low margins so that there would be insufficient profit for  the franchisor and a franchisee to share.

The most popular areas of business activity for franchising include:

Fast food/ Restaurant/ Catering, Retail Shops, Business Services/ Computers, Health/ Leisure and Distribution/ Delivery Services.

The most recent NatWest BFA Franchise Survey indicates that the annual turnover of business format franchising in  the United  Kingdom  was approximately £9.65 billion.  695 systems were in existence with a total of 33,800 franchised units.

Advantages/Disadvantages of Franchising for Franchisees

The advantages of franchising to a franchisee are:-

  • Franchisees do not have to have general business/management skills or indeed specialised knowledge of the proposed business activity;
  • Franchisees can take advantage of the name and reputation which has been built up by the franchisor.  This may reduce the lead time required to make a business successful;
  • Usually a franchisee is required to invest less of his capital in the business because of financiers’ willingness to assist franchisees by reason of the proven success of franchising;
  • Finance may be more readily available to franchisees than to those setting up in business on their own account;
  • The risks of business failure are substantially reduced;
  • The franchisee is able to make use of the franchisor’s purchasing power, and there may be other benefits relating to the size of the franchisor's business;
  • National advertising is undertaken by the franchisor for the benefit of the franchisee;
  • Assistance and training is (or ought to be) given throughout the term of the franchise;
  • In the case of some franchises a franchisee will receive territorial protection.

However, franchising may have disadvantages for franchisees:-

  • A franchisee is subject to substantial control from the franchisor. No restrictions would be placed on the franchisee were he to set up in business independently;
  • A franchisee will have to pay royalties and/or a mark-up on the goods or services which he receives from the franchisor or his nominated supplier;
  • There may be restrictions on the franchisee’s ability to sell the franchised business or to pass it on to a relative.  Further the franchisor may require payment should the franchisee’s business be transferred;
  • The franchisee’s business will be directly affected by the actions or insolvency of the franchisor.

Advantages/Disadvantages of Franchising for a Franchisor

The advantages of franchising for a franchisor are:

  • Franchising offers the opportunity to secure distribution for its  products or  services  more quickly than would be the case if the franchisor had to train  up its  own  employees  and  develop  its   own  internal  marketing,  sales  and distribution organisation;
  • The use of franchisees' capital will facilitate the expansion of a network more quickly than would be the case if the franchisor had to find the funds itself;
  • Many  companies  involved in the distribution or supply of  services  using their  own  employees  may  wish  to  motivate  employees  by  linking  the employees'  remuneration  to  the  sales they achieve.  Franchising takes this one step further.
  • Franchisors, with their increased purchasing power (and possibly reduced overheads) may be able to increase the profitability of small units;
  • Franchisors are likely to have lower gearing than non-franchised businesses and as a result may be able to survive better in a recession.

The disadvantages of franchising to a franchisor are:

  • Loss of control over confidential information and the franchisor’s brand name;
  • Part of the franchisor’s profits will be shared with an additional entity (the franchisee) in the distribution chain;
  • The skills required to control franchisees and provide back-up are different to those involved in operating a business with only employees.