1.4.1 Different Types of Business Organisation

Franchises: Advantages and Disadvantages

A franchise is a business arrangement where a franchisor grants a franchisee the right to operate a business under the franchisor's established brand name and system. This model offers distinct advantages and disadvantages for both the franchisor and the franchisee.

Franchisor: Advantages

• Rapid Expansion: Franchising allows for quicker business growth with less capital investment compared to opening company-owned outlets.
• Reduced Financial Risk: The franchisee bears the financial burden of setting up and running their own business.
• Motivated Management: Franchisees have a strong incentive to succeed as their income is directly linked to the performance of their franchise.
• Local Market Knowledge: Franchisees possess valuable insights into their local market, customer preferences, and competitive landscape.
• Increased Brand Awareness: Expansion through franchising significantly increases brand visibility and market share.

Franchisor: Disadvantages

• Loss of Control: Maintaining consistent quality and brand standards across all franchise outlets can be challenging.
• Potential for Conflict: Disagreements can arise between the franchisor and franchisees regarding operational procedures, fees, and marketing strategies.
• Dependence on Franchisees: The success of the franchise system relies heavily on the performance and commitment of franchisees.
• Risk to Reputation: Poor performance or unethical practices by one franchisee can damage the reputation of the entire franchise system.
• Limited Revenue per Outlet: The franchisor receives a percentage of the franchisee's revenue, which may be lower than the profit they would make from a company-owned outlet.

Franchisee: Advantages

• Established Brand: Benefit from a well-known and trusted brand name, reducing marketing efforts and attracting customers.
• Proven Business Model: Operate a business with a tested and successful operating system, minimizing the risk of failure.
• Training and Support: Receive initial training and ongoing operational support from the franchisor.
• Reduced Financial Risk: The initial investment is typically lower than starting an independent business.
• Economies of Scale: Benefit from the franchisor's bulk purchasing power, potentially leading to lower costs.

Franchisee: Disadvantages

• Loss of Autonomy: Limited freedom in making operational decisions and adhering to the franchisor's rules and regulations.
• Ongoing Fees: Required to pay ongoing fees (franchise fee, royalties, advertising fees) to the franchisor.
• Limited Market Control: Unable to independently adjust pricing or marketing strategies.
• Potential for Conflict: Disputes can arise with the franchisor regarding operational issues or contract terms.
• Dependence on Franchisor's Reputation: The success of the franchise is directly tied to the franchisor's reputation and brand image.

Summary Table

Aspect	Franchisor Advantages	Franchisor Disadvantages	Franchisee Advantages	Franchisee Disadvantages
Expansion	Rapid expansion with lower capital	Dependence on franchisees	Established brand, proven model	Loss of autonomy
Financial Risk	Reduced financial risk	Potential for conflict	Reduced financial risk	Ongoing fees
Management	Motivated management	Risk to reputation	Training and support	Limited market control
Market Knowledge	Local market knowledge	Limited revenue per outlet	Economies of scale	Dependence on franchisor's reputation

Understanding the advantages and disadvantages of franchising is crucial for evaluating its suitability as a business model for both potential franchisors and franchisees.