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Franchising Disadvantages  

The franchise system is designed to work well for both the franchisor and the franchisee.  The franchising agreement is a contractual relationship between the franchisor and the franchisee to help build mutually beneficial business operations.  This franchise approach helps to develop profits and a healthy and prosperous business life for both the franchisee and franchisor.  However, there are some disadvantages to the franchisee which you need to be aware of before beginning your franchising operation. 

Failed Expectations Franchising is like a coin--it has two sides.  The franchisor's business experience, expertise, trademark, selling methods, and advertising are part of what the franchisee desires to acquire.  Often a franchisee sees this business opportunity as a sure bet.  This is not true.  While the franchise system provides a tremendous opportunity to utilize a successful system in a new location, it does not always succeed.  If the location is terrible and/or their are insufficient customers available within the given target market area, then generally the franchise operation will not succeed.  If the franchisee expects to only work 10-20 hours a week, to reap huge benefits, then generally the franchisee will not succeed.  If the franchisee is doing this only as a financial investment and is providing no hands-on service and leaving the entire operation to a salaried employee, then the probability of success is greatly diminished.  

Franchising generally succeeds when the new franchisee correctly adopts the marketing, management, principles and practices what the franchisor is offering.   

Cost of a Franchise  It is not cheap to start a franchise business.  The cost of a franchise generally begins with the franchise fee and then the rest of the start-up costs including land, building, fixtures and furnishings, inventory, signage, and training programs.  The final total investment grows rapidly and becomes surprisingly large.  The start-up costs for a Dairy Queen restaurant is now estimated at $370,000-$715,000 depending upon location and building.  This is in addition to an initial franchise fee of $30,000 and a royalty fee of 4% with an advertising fee of 3-6%.  On the other hand, you can start a successful Welcome Host franchise for total start-up costs, including franchisee fee, of $25,000-$30,000. 

Loss of Independence An apparent frequent disadvantage is that entrepreneurs leave behind the opportunity of having absolute independence.  A franchisee will surrender a considerable amount of independence when the franchise agreement is signed.  Certain franchisees may wish to change the products or services being offered -- this is often forbidden by the franchise agreement.  Franchisees need to realize that they will be following a business operation prescribed to them by the franchise organization.  This does not destroy the need for creativity, drive, and high standards on the part of the franchisee.  It is only through personal efforts that the franchising system ultimately works.   

Termination of Agreement  The franchise agreement is originally signed for a specific period of time, generally 10-20 years.  Some franchise agreements only last 2-5 years while others go on for perpetuity.  Generally, the franchise agreement includes the clause for renewal and without "just cause" by the franchisor then the franchise agreement is automatically renewed for a period of time, often 5-10 years in length.  Almost all franchise agreements contain provisions concerning the franchisees transfer of ownership rights to others, termination of the agreement, renewal of the agreement and a covenant not to compete.  Any of these provisions may be used by the franchisor if the franchisee fails to follow all of the provisions of the franchising agreement.   

Performance of Other Franchisees A disadvantage often overlooked by new franchisees is the performance by other franchisees.  If other franchisees begin to lower their standards and diminish the quality of products or services, then this reflects upon the total franchising system.  This brings hardships to the franchising program and diminishes the value of the franchising organization throughout the system.  The franchisor can not afford becoming lax in managing the franchise system and must maintain quality standards throughout the network.  Poor performance ends up reflecting throughout the system and not just in one specific local.

In summary, you, the franchisee, need to realize the advantages and disadvantages of a franchising system.  Most of the advantages are concerned with the advice and assistance available from the franchisor while the disadvantages concern the over dependence which you might have upon the franchise system.  You need to carefully weigh the advantages and disadvantages while at the same time analyze the opportunity for profitability and your willingness to enter this specific business organization.  The final decision is yours. 

Services Provided by the Franchisor  

You need to understand what the general services are that will be provided you by the franchisor.  In addition to the initial basic management training, you will also be provided field assistance for opening and a continuous operation of your franchise business.   

You generally pay the initial franchise fee to begin the operation of the franchise.  Most franchisors collect the initial franchise fee simply to help offset the initial start-up costs of a new franchise.  It is seldom that the franchisee covers the entire costs of starting a franchise. 

Once you have started, you are then required to pay continuous royalty fees generally based on the gross revenues of your business.  These royalty fee payments generally range from around 3-8%, and allow you to receive added services from the franchisor.  These services are generally referred to as "continuous value added."  The franchisor should provide you value added services which help maintain and enhance your business operation throughout the entirety of your franchising experience.  Some of these services include start-up assistance, site location, building design, equipment purchase, store layout, standardized accounting systems, cost-control systems, record keeping systems, standard monthly operating statements, financial assistance, training programs, field support services, advertising programs, marketing programs, and promotional programs, new products, new services, customer service standards, and discount quantity purchases. 

In many cases, the marketing and advertisement programs of the franchisor provide more than sufficient money through added sales and services to the business.  For example, the advertisements by McDonald's and Wendy's are one of the main reasons why many people continue to go back to the stores and purchase the products.  Advertising helps build top-of-the-mind awareness and keeps the products and service in the minds of the consumers.

The franchisor will also provide quality field support services.  These services normally include representatives from the headquarter organization visiting with you in your store to help you analyze your product, presentation, as well as your markets and managerial programs.  The field support service representatives are in touch with many different franchisees and can help you in contacting other franchisees with similar problems or successes.

Kwik Kopy has developed the Star program which divides their franchisees into five sales different levels. A franchisee at the fourth level may ask the franchisor for help from a franchisee at the fifth level.  The fifth level franchisee then receives a report from the fourth level franchisee and then goes and visit the other franchisee on a consulting basis.  After consulting with a franchisee at a higher lever, many franchisees have been able to raise their sales and even increase their own sales level a notch.