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Franchise Advantages

Franchising is both a method of distribution and a business entity.  In marketing parlance, marketing is generally envisioned as a channel or method of distribution.  In the world today, franchising has outgrown this narrow concept.  Franchising today provides a complete business opportunity that is involved with management, accounting, finance, economics, quantitative analysis, and marketing.

The franchisor provides the franchisee an opportunity to operate a tested, proven, and profitable business coupled with support services which increase the chances of success in the market place.  Several business concepts have floundered and failed after having been franchised.  It is more than just a business concept.  The success of a franchise system provides a high quality product or service which is supported by the franchisor's ability to train and develop the franchisee into a successful business person.  The franchise system is as important, or more so, than the product or service sold to the ultimate consumer. 

There are many advantages to franchising.  Some of the more important advantages include:  expansion, motivation, capital investment, good profit margins, and business opportunities. 

Franchising allows for intensive and rapid expansion of a regional or national business system.  This is often done with far less capital and management personnel than would be required for company owned or joint venture facility.  A entrepreneur is allowed to create a franchising chain which will create a business expansion with limited capital, limited risk, and limited equity investment. 

Generally, franchising is particularly useful as an expansion method in a capital intensive business or when there are large sums required for expansion.  In a franchising system, the capital cost, expansion and development risk are borne by the franchisee.  

A franchisor does not have to incur the cost of start-up for each unit opened.  The franchise company generally requires fewer management personnel than a chain organization and therefore has a lower staff payroll and fewer staff problems.  Additionally, as the franchise system goes, the franchisor may find potential investors who are willing to buy into the franchise company and allow the franchise system to expand more rapidly.  People with little or no experience may be willing to buy a franchise as a potentially profitably investment and use professional managers to run the franchise units.  Franchising, therefore, can attract capital through direct investment in the parent corporation, through direct investment in the start-up or sale of franchises, and through direct investment as an investor in a franchise unit. 

Franchising is also a recognized method of generating good profit margins in many businesses.  Most business start-ups will not seek expansion into franchising unless they can show a bottom-line profit of 15-20%.  This allows the prospective franchisee to earn a good return on their investment as well as being able to pay all franchise royalties and fee payments.  The permanent resident in a community is more likely to commit greater resources when purchasing a franchise and in developing a financial stake in the local business. 

Another advantage generally recognized for the franchisor is that franchisees are generally more highly motivated than company owned managers or employees running a business.  The franchise unit will be operated by a owner and not by a company employed manager.  The franchise unit generally benefits from the owner's motivation, dedication, personal interest, and self-direction in developing and operating a successful business.  Quite often the franchisee is a respected and influential member of the local community and will have added support and assistance from the community business network. 

Franchising also offers many business advantages such as bulk purchasing arrangements by the franchisor for the franchisees.  With businesses that use parts inventory, supplies, or products, the franchisor can arrange favorable buying terms for franchisees from  distributors or manufactures.  The franchisor also uses a common accounting system and thereby is able to measure and compare the success and profitability of different units.  Franchisees can also learn from other franchisees how to work on and improve their own businesses.  Except for establishing prices (price fixing), franchisees may discuss almost all aspects of their businesses with other franchisees and help each other to become more successful and profitable.

For a business just starting with insufficient capital to expand through company owned outlets is almost impossible.  Franchising is a dominant way of developing a track record and being able to expand your business with limited resources.  This allows the business to develop credit and trade references which are beneficial to the franchisor and the franchisee. 

Franchisors also may authorize or locate franchisees in geographic areas which they themselves would not choose to develop business locations or are unable to during the initial stages of expansion.  By transferring the responsibilities of the business to the franchisee, the franchise headquarters will require fewer management personnel while developing an effective monitoring and control system of the company operations.  Local franchisees and employees will be responsible, for the greater part, of adhering to quality standards and following the control systems of the company.  A franchisor does transfer the direct responsibility for the day-to-day details and problems of the business to the franchisee, including: hiring, staffing, planning, developing facilities, sales, paying business taxes and obtaining permits.