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Disadvantages of the Franchise System

A Franchise also has drawbacks, and it is important that you give them full consideration before making any sort of commitment. The drawbacks fall into three categories:

  1. Lack of independence
  2. Inflexibility
  3. Risk associated with the franchisors performance

LACK OF INDEPENDENCE

An important feature of franchise system, is that every aspect of the business format is defined and each outlet is operated strictly in agreement with this format. Not everyone would be happy to operate a business under such constraints and you must consider how well you can accept this aspect of the franchise system.

Discipline:

Being a franchisee means working within a franchise system in which there is little freedom or scope to be creative. Almost every aspect of operating the  franchise business is laid down in the franchise operating manuals.

Franchise Monitoring :

Regular field staff monitoring visits are welcome initially, but as time passes you will feel able to do your own trouble-shooting and you may come to regard the franchisors interest in your franchise as an intrusion - it is after all your business.

Service Charges:

At first these services are necessary and franchisees do not mind paying for them. However as time goes on, if less use is made of the franchisors services then franchisees can resent making the continuing payments.

Reputation:

Each franchisee affects the reputation of the whole franchise system, depending on their performance and ability. In many franchises there is a wide gulf in the quality of product or service between the best and the worst franchisees. Thus any franchisee can harm the reputation of all the franchise outlets in the franchise chain.

INFLEXIBILITY

Responding to the market:

 Owning a Franchise tends to be an inflexible method of doing business as each franchisee is bound by the franchise contract, to operate the business format franchise in a certain way. This can make it difficult for a franchisor to introduce changes to the business format franchise, refit outlets, or introduce new types of equipment. In some franchises it can be difficult for a franchisee to respond to new competition or to a change in the franchise local market.

The job itself:

What may seem an attractive challenge now could become boring after a few years so it is important that you choose a franchise in which you will enjoy the work, or which has potential for growth.

RISK ASSOCIATED WITH FRANCHISORS PERFORMANCE

It is important to recognise that not all franchises are soundly based or well run. In signing the franchise agreement you are formally binding yourself to a particular franchisor and it is therefore vital to select one which is competent and ethical.There are 4 different categories of franchisor:

  • The Established Franchisor
  • The New Franchisor
  • The Unethical Franchisor
  • The Incompetent Franchisor

Some should be avoided at all costs others will vary in attractiveness according to the level of risk you are prepared to take.

The Established franchisor:

This represents the least risky type of franchise opportunity. The business format will have been fully tested in a number of locations and although the initial cost of such a franchise may be relatively high, a franchise with this type of company will be highly attractive to anyone for whom security is important.

The new franchisor:

There is nothing intrinsically wrong with a new franchise but great care must be taken in deciding to invest in any particular franchise. As franchisors incur high initial costs, they need a minimum number of franchises to break even. When a franchisor has fewer than the break-even number of franchises it is likely that

  • More effort will go into selling franchises than into providing support services.
  • There will be some deficiencies in services in order to keep costs down
  • Financial resources will be strained.

In this start-up phase the franchisor is vulnerable to financial problems if franchises cannot be sold quickly enough. Franchises in this take-off phase are potentially those, which will earn the highest returns, for example if the product or service is outstanding in some way a large territory can be covered. With a franchisor you are in a position near that of an independent business - greater return. Depending on the risks you are prepared to take, this type of franchise may be attractive, or one to be avoided.

The Unethical Franchisor:

Unfortunately some franchisors have no intention of entering a long-term support relationship with the franchisee, instead they have heard that franchising is a way to make money quickly out of gullible franchisees. This is done by setting up a shell franchise - lots on offer but nothing to back it up, then selling such franchises to those who are so keen to become a franchisee that they fail to make a thorough appraisal of the business on offer. Make sure that you spot this type of franchise, take time to investigate different opportunities. You cannot afford to learn from your mistakes.

The Incompetent franchisor:

These are franchisors who are not offering franchises to perpetrate fraud but who are incompetent in one or more of the following ways

  • The basic business is unsound
  • The franchisor is under-resourced
  • The franchisor is inept.

A business will be unsound if the product or service on which it is based is unable to generate an adequate level of sales or profit. A competent franchisor will test the business concept both through market research and by operating a pilot outlet before offering franchise opportunities for sale. An incompetent franchisor is unlikely to do either of these things.In addition, it is expensive to become an ethical and competent franchisor. If the business format is tested thoroughly, the franchisor will need to carry the establishment costs for up to two years before being in a position to generate income by the sale of franchises. An under-resourced franchisor will be unable to fund this need adequately. Not only will start-up assistance and operating manuals be of poor quality, but the franchisor is also unlikely to be able to provide a high standard of support.This can be particularly important if you are considering a franchise opportunity where your outlet will be located far from most of the franchised area. In these circumstances the cost of providing services can be heavy for a franchisor that does not have many outlets near you.It is important to recognise that the franchise is a long term relationship, and that the franchisor company may change direction, for instance if it is taken over or moves into international markets.

The Inept franchisor:

This type of franchisor may be enthusiastic about the concept of franchising but has little understanding of how and why the system works or of the services that will be provided. This type of franchisor can cause untold harm to the viability of the franchisee business. You should recognise that many franchises on offer will fall short of ideal.

McDonnell, McPhee & Associates  2008 - 2009

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