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Franchise Disadvantages

Franchising is not a solve-all business opportunity.  It is not a miraculous problem-free solution to business expansion.  Franchising is an excellent opportunity to expand through the use of other individuals, their investments, their desire and drive.  While envisioning a franchising program, it is important to look at not only the advantages but also the disadvantages of developing a franchising system.  It is important to discuss these disadvantages in terms both of (1) the use of company owned units against franchise units and (2) difficulties associated with the franchise system. 

Company owned versus franchisee owned units.  A franchisor has a definite decision to make about expansion through company owned or franchise owned units.  There are many clear advantages to company owned units including more control over units--ease of instituting changes in units; ease in testing new products or services; ability to change the basic products; and even the ability to change the mission or goals of the organization.  Because the headquarters' organization controls all units by virtue of ownership, the reporting system, managerial system, and marketing system are all easily controlled by the headquarters' organization. 

However, these are also some of the major disadvantages of company owned stores.  This requires a fairly extensive managerial team to oversee and control all the units and activities in each unit.  The cost of maintaining and developing company owned units is very expensive and often difficult to obtain. 

There are also many potential problems associated with the franchising system.  The franchisor will lose freedom of operation unless they establish a franchise system.  The franchise agreement or contract will become a legal document binding the franchisor and the franchisee to specific business codes and conducts.  The franchisor will lose freedom as new franchisees become part of the franchise system.  Independent business persons will often make decisions and change policies within their organizations without telling the franchisor.

The franchisor will also be faced with recruitment in signing of good franchisees.  One of the most difficult situations a franchisor will also face is how to deal with disgruntled franchisees.  How do you assure that each franchisee you sign will be an honest and faithful member of your franchise family?

One of the most difficult problems associated with franchising is simply the communication which must exist between a franchisor and franchisee.  

Rule of Thumb:  Most successful franchisors view their franchisees not on a superior-subordinate relationship but rather as partners or co-owners of a business concept and vision.  

A franchisor needs to realize that they are now working with several independent business people who have their own ideas and ways of doing things.  The franchisor needs to be mindful of this and work with each franchisee on an individual and different basis. 

Additional disadvantages of franchising would include the exposure to liability for the acts, negligence, or omissions of the franchisee.  The franchisor will also have limited options and flexibility in working with the franchisee and in changing products or programs.  The franchisor will have the difficult task of keeping the franchisees satisfied and dedicated to the business and the franchise system.  Additionally, a franchisor will on occasion have a problem of dealing with substandard franchise performance.  This problem can create damage to the reputation and longevity of the franchise system.  Additionally, there may be instances, because of favorable locations, where a headquarters owned outlet may have profits which exceed those of franchise units.

Franchising is a extraordinarily effective and useful method for business expansion.  It needs to be properly developed, analyzed, and planned.  The franchise expansion may occur through individual franchise units, conversion of independent businesses, area development agreements, subfranchising or even master franchising arrangements.  Many companies are very successful in their franchising endeavors because of their dedication to detail and their willingness to listen and to improve upon their operations systems.