One of the most important advantages of buying a franchise is that the entrepreneur does not have to incur all the risks associated with creating a new business. Typically, the areas that entrepreneurs have problems with in starting a new venture are product acceptance, management expertise, meeting capital requirements, knowledge of the market, and operating and structural controls. In franchising, the risks associated with each are minimized through the franchise relationship, as discussed below:
Advantages to the franchisee:
1. Product acceptance: The franchisee usually enters into a business that has an accepted name, product or service. Example: In case of Subway,
(a) Any person buying a franchise will be using the Subway name, which is well known and established throughout the United States.
(b) The franchisee does not have to spend resources trying to establish the credibility of the business. It already exists based on past performances from how long the franchise exist.
(c) The franchise has also spent millions of dollars in advertising, and thus build a favourable image of the products and services offered.
2. Management expertise:
(a) Franchisee always get the advantage of managerial assistance provided by the franchisor.
(b) Special training programme and education provided by them on all aspects of operating the franchise like classes in accounting, personnel management marketing and production. Example: McDonald’s, for example, requires all its franchisees to spend time at its school, where everyone takes classes in these areas. In addition, some franchisors require their new franchisees to actually work with an existing franchise owner or at a company-owned store or facility to get on-the job training. Once the franchise has been started,
• Most franchisors will offer managerial assistance on the basis of need.
• Toll-free numbers are also available so that the franchisee can ask questions anytime.
• Visit the local franchisees to offer advice and keep the owners informed of new development.
• The training and education offered is actually an important criterion that the entrepreneur should consider in evaluating any franchise opportunity.
• If the assistance in start-up is not good, the entrepreneur should probably look elsewhere for opportunities unless he or she already has extensive experience in the field.
3. Capital requirements:
(a) The franchise offers an opportunity to start a new venture with up-front support that could save the entrepreneur’s significant time and huge investment of capital. They also provide initial investment to start operation.
(b) Some franchisors conduct location analysis and market research of the area which include an assessment of traffic, demographics, business condition and competition. The initial capital required to purchase a franchise generally reflects a fee for the franchise, construction costs and the purchase of equipment. The layout of the facility, control of stock and inventory and the potential buying power of the entire franchise operation can save the entrepreneur significant funds.
4. Knowledge of the market:
(a) Any established franchise business offers the entrepreneur years of experience in the business and knowledge of the market. This knowledge is usually reflected in a plan offered to the franchisee that details the profile of the target customer and the strategies that should be implemented once the operation has begun. This is particularly important because of regional and local differences in markets.
(b) Competition, media effectiveness, and tastes can vary widely from one market to another. Given their experience, franchisors can provide advice and assistance in accommodating any of these differences. Most franchisors constantly evaluate market conditions and determine the most effective strategies to communicate to the franchisees. Newsletters and other publications that reflect new ideas and developments in the overall market are continually sent to franchisee
5. Operating and structural controls:
Two main problems that generally an entrepreneur face during the start-up:
(a) Maintaining quality control of products and services.
(b) Establishing effective managerial controls. The franchisor, particularly in the food business, identifies purveyors = and suppliers that meet the quality standards established.
Some of the supplies are actually provided by the franchisor. Standardization in the supplies, products and services provided helps ensure that the entrepreneur will maintain quality standards. Administrative controls unusually involve financial decisions related to costs, inventory and cash flow and personnel issues such as criteria for hiring/firing, scheduling and training to ensure consistent service to the customer. These controls are usually outlined in manual supplied to the franchisee upon completion of the franchise deal. Although all the above are advantages to the franchisee, they also represent important strategic considerations for an entrepreneur who is considering growing the business by selling franchises. Since there are so many franchise options available for an entrepreneur, the franchisor will need to offer all of the above services in order to succeed in the sale of franchises. One of the reasons for the success of such franchises as McDonald’s, Burger King, KFC, Boston Market, Subway, Midas, Jiffy Lube, Holiday Inn, Mail Boxes and Merry Maids is that, all these firms have established an excellent franchise system that effectively provides the necessary services to the franchisee.
