From the standpoint of the franchisee what are the primary advantages and disadvantages of most franchise?

Answer 1

The most obvious advantage is a recognized name and logo that implies certainty and confidence in product for the consumer who generally believes that he is buying a product or service from a large corporate entity who has guaranteed satisfaction. The average American consumer has no idea that the franchise is individually owned and operated and that the franchisor has no capital investment in the franchised unit. The other possible advantage of a franchise is the support received from the corporate office. These will vary from franchise to franchise, but support is often is not spelled out in specific terms in the franchise contract -- but should be. Generally speaking, the franchisee receives a solid, proven business plan, proven to work at least once or many times, by reason of the standing franchises indicated in Item 20 of the Franchise Disclosure Document and other information. i.e., where to locate, size of facility, how/who to hire, best forms of advertising, capital required). Franchisees also receive an operating plan with mandated day-to-day policies and procedures, i.e. hours of operation, royaltiy report timelines, and Point of Sale (POS) system. The supply chain is already established with vendor contracts negotiated on a national level resulting in lower costs of supplies and materials. There could also be national contracts set-up with insurance companies, financing institutions, etc. There could even be national contracts set-up with customers. All of these may allow a franchisee to start the business more quickly, while avoiding common mistakes made by independent small business persons. There will be on-going support for the franchisee: National advertising campaigns, functional support (product development, customer service telephone numbers, perhaps legal advice, tax advice, artwork production, etc). There could be periodic meetings amongst franchisees to share information (success stories, changes in technology or the market, etc). But, remember fellow franchisees may also be competitors when they encroach on your territory and there is movement in retail Franchising in some concepts for franchisors not to identify territories. The disadvantages of a franchise up front in the sales process is that the new buyer of a new franchise can't access the unit performance statistics of the system, as known to the seller, the franchisor, and has to try to assess the risk and the rewards from interviews with franchisee references, past and present, provided by the franchisor in Item 20 of the Franchise Disclosure Document (FDD). Thus, any misrepresentations, etc.. that the buyer franchisee relies on are proximate to the references and not to any misrepresentations made by the franchisor and the franchisor is protected from fraudulent inducement/concealment in the sales process(See Article in American Business Law Journal, 02 Jan 2003, entitled "Franchising Fraud: the continuing need for reform" in a Google Search) even though the material risk factors of unit profitability and unit failure are not disclosed to the new buyer in the sales process. Additionally, there are basic fees and restrictions and high sunk costs for the startup franchisee who finances and builds a new unit on which to wear the brand name. . The franchise pays an initial franchise fee plus on-going royalties usually calculated as a percentage of gross sales and there could even be a monthly minimum royalty. In a competitive economy, small business net income is usually tight, say, less than 10% (if there was a business where you made a 50% net income, others would jump into the business forcing down prices and profits). If the franchise royalty is 7% off the top, the franchise has to operate that much more efficiently to make a decent profit. The franchise may be restricted from engaging in certain activities or offering different product lines. The franchise may be required to use certain suppliers or even required to purchase certain items directly from the corporate office. This limits the franchisees opportunity to maximize profit and ability to cater to his local market. The franchisee may never be able to get beyond breakeven in the operation of the business and can only sell the business to another with the approval of the franchisor who demands a release of any liability for the sale-transfer of the business to another as a condition of the approival of the sale. There is a "failure fee" built into most franchise agreements that encourages the break-even franchisees to continue to try to get beyond break- even or to sell their franchises at a loss or a wash to get out from under the obligation of the long-term contract. If the franchised business never gets to breakeven and the franchisee is at risk of insolvency, the franchised business generally has to be "given away" in a fire sale to get out from under the debt owned and personally guaranteed for both the franchise and the unit lease in an effort to, if possible, be saved from personal bankruptcy. Who knows how many thousands of failed franchisees continue to pay on startup debt after failure in order to avoid personal bankruptcy, and who knows how large this subsidy of franchising is in terms of actual dollars?