Franchising is an agreement according to which one of the parties, named franchiser, transfers to the other party, named franchisee, a right to practice specific business activity and to use brand for a certain price. In fact, franchising is created for those who want to copy successful business of enterprise which possesses rich experience and good reputation. Franchising as a modern economic concept, which has got its wide-spreadness in the second part of XX century, and today claims to be a universal business practice. This method combines experience, professionalism, reputation and desire for further development of franchisees as well as ambitions, desires to work and develop franchise at all.
In order to meet the aim of my research work I would like to start analyzing the main benefits of franchise as form of business activity from both legal and economic point of view while comparing it with dealership and independent business. In broad terms, franchising has a lot of tempting preferences which even can outmatch its drawbacks in quantity. They are the following.
Financing of future business
If any person is going to deal with business activity and wants to create its independent business, he or she may need money. The source of it may be her or his savings, credits from the banks and other credit institutions. In franchising system a franchisee is entitled to borrow money from franchisor in credits or grants etc, if necessary. So that, we can inference that a franchisee in comparison with independent business owner, starting his business, has additional sources of money needed for his activities – a franchisor.
Secondly, a franchisee should not create any new ideas, technologies, business plans. For a certain sum of money he gains access to all information about business model, which has existed for a long time and proved to be successful, profitable and competitive. Moreover, franchisor may be obliged by agreement to provide franchisee with all necessary equipments, technologies, information about manufacture process, and indicate at certain suppliers to deal with them. In fact, franchisor receives almost completely finished enterprise which is ready for producing goods or services, and all what is required from franchisee is just to devote his energy, time, money and desire to make it alive. Instead of it, when a person starts its own business usually he or she does not receive any tips or recommendations how to deal with business partners, where to find suppliers, buy equipment and in what part of area his or her business activity will be realized. The owner acts on his own and it may lead to different risk and unexpected even uncontrolled situations.
When a person buys franchise he or she automatically has a right to use trade mark and brand of franchisor. In its turn, this leads to additional benefits. Firstly, he should not spend additional costs for advertisement to make people aware of newly opened enterprise. Secondly, customers already exist even before opening day. All of them get used to products or services that will be provided because of previous experience connected with using of products and services of the same brand.
Franchise system is considered to be very strong and resistible to any challenges of economic crises and other events. According to latest reports, a lot of enterprises which belong to franchise system survived during crises in comparison with small enterprises who act at its own discretion without any governmental or private help. This is explained by the fact that when a franchisee has any problems or difficulties, he or she may apply to franchisor or other franchisees of the same chain asking for help, for example, in settlement of legal dispute or to resolve problems with other business partner. At least they do receive some practical recommendations as to improvements which are to be made in order to overcome difficulties. Finally, if necessary, a franchisee may receive financial support from franchisor or banks or other credit institutions using the reputation of brand. Of course, it goes without a doubt that independent business owner does not get any help or at least recommendations from others and has to deal with his problems on his own.
According to conception of franchise a franchisee is treated as co-owner of the enterprise or as a powerful partner. This feature differentiate him from being merely a distributor who is not involved in manufacture, not treated as a partner and who just make a product or service accessible in different areas. A franchisee has more powers, rights; he or she can initiate some improvements or innovations as to already existing brand or process. So, as usual, a franchisee in contrary to dealer does care about business and does his best to keep it the best and high-competitive.
Franchising promises higher profit and it is received and accumulated more quickly than in independent business created without franchise. As usual, a person who creates new enterprise invests money during first months or even years without earning profits in return, which happens because of wrong economic decisions, customers’ unawareness of new enterprise or just inability of a person to organize business activities.
Next benefit of franchise is connected with mentioned above and is connected with some types of discounts which may be offered to franchisee because of his appliance to the chain and because a dozen of products, row materials etc, which are bought from certain suppliers and these relationships between elements of franchise system and suppliers are expected to be stable and to endure during specific term. In comparison with owners of independent business, we can say that their relations with suppliers have different character and definitely they are not to be stable, and as a result of this and other reasons owners do not get so large discounts as franchisees as well as other bonuses.
So, these are the main advantages of franchising and I dare say that this form of ownership is very suitable for those people who has enough money (since franchise may be an expensive purchase) and who don’t want to create a new enterprise but to continue and develop already existing business in areas where it’s not spread so widely and to acquire some benefits of franchise system such as protection and help in case of arising of different problems as well as receiving recommendations regarding enterprising which in the end makes providing of business activity more easier for investor that is franchisee.
On the other hand, in order to be objective and well-informed with all aspects of franchising we have to know its drawbacks or weaknesses as well. In my opinion, they should not be regarded as disadvantages but just as some negative aspects of business activity which to some people may appear just as normal business practice while at the same time they may appear inadmissible and unsustainable for others. So, the main drawbacks or negative sides of franchise are the following:
Franchise is a kind of restricting of freedom of enterprise of every person since, as usual, according to signed agreement, she or he is bound to act in specific area, to receive products and materials from certain suppliers. There are a lot of requirements to quality of production, produced by franchisee; he or she is expected to sell goods or provide services for a fixed price. In contrary, an owner is free to choose any supplier or partner he wants. He may start his activity wherever he or she wants and of course he or she is entitled to determine the price on their own.
High royalties and other advertising payments which are to be paid by franchisee
So, as it was already mentioned, purchase of franchise may be very expensive and franchisor must be ready to pay not only this money but also a fixed sum, for example, percentage from the income received during fixed term.
Speaking about legal mechanism of protection I dare say that those of franchisor are more strong that those of franchisee. Some experts even state that franchisee is almost unprotected according to current laws(D.Holmes, 2003, p.2-3).
Possibility of termination or not renewal of contract. In some cases, when franchisor refuses to renew a contract or even terminate a contract if it was breached by another party are very often and in accordance with law. As a result of it, franchisee has to return all equipment, sign confidential agreements and to come through other procedures. In fact, all his efforts in business may be neglected by franchisor and considered to be worthless. In addition, franchisor is not entitled to get the initial sum of money which he paid for franchise.
High legal expenses
All guidelines about franchise recommend people who has desire to buy a franchise to apply to lawyers who will ensure that their interests and rights are protected at best and who will defend franchisee if there will be such a need. (D.Holmes, 2003, p.2-3).
Restrains connected with unusual distribution of products and services by means of internet, mails, TV etc. So, according to the terms of agreement it may be prohibited for franchisee to use other methods of distribution of goods because it may cause financial damages to those co-franchisees who acts within specific area.
Control of franchisor
Under the laws franchisor is has a right to control franchisees and to conduct inspection, revision of activities provided by franchisor wherever he wants in relation to quality of products, its prices, suppliers of materials etc.
Summing it all up, I dare say that franchising is a special form of ownership and has some advantages and weaknesses in comparison with other forms of business activity and ownership. In my opinion, the main advantages of franchise are its safety and ability to resistance to any challenges brought by economical crises and other financial problem. First of all, franchise is a good and safe investment and may be considered as a perfect instrument for those who do not have enough courage and abilities to start its own business or person just want to be a member of franchise system and gain its preferences and additional benefits.