Benefits to the franchisor include regular royalty payments, expansion with reduced financial risk, and a greater geographical presence.
Franchisee benefits include lower risk, lower startup costs, existing brand recognition, and parent company marketing support. Franchisees have a higher chance of success due to tried and tested business model and traning and expertise from the franchisor.
Potential franchisees can select a franchise based on their location, interests, resources, and needs, which means that entering into a franchising arrangement can be a flexible process.
Franchisor: A company or person that authorizes another to sell or distribute its goods or services in a certain area.
Royalty: Regular payment from the franchisee to the franchisor for the right to be a franchisee.
Benefits for the Franchisor
Franchisors benefit from franchise agreements because they allow companies to expand much more quickly than they could otherwise. A lack of funds and workers can cause a company to grow slowly. Through franchising, a company invests very little capital or labor because the franchisee supplies both. The parent company experiences rapid growth with little financial risk.
A company can also ensure it has competent and highly motivated owners and managers at each outlet through franchising. Since the owners are largely responsible for the success of their outlets, they will put in a strong and constant effort to make sure their businesses run smoothly and prosper. In addition, companies are able to provide franchising rights to only qualified people.
Other benefits include:
- Franchising allows a business to have an international presence.
- Franchisors can experience economies of scale.
- Franchisors can benefit from growth without worrying about running costs.
- Franchisors receive royalty payments that are set as a percentage of profits.
Benefits for the Franchisee
The franchisee also has numerous advantages that come from entering a franchising agreement, including:
- There is a low risk due to the tried and tested formula. Buying a franchise business provides a higher chance for success. They get the benefit of owning a proven business formula that has been tested and shown to work well in other locations. In addition, they receive the support from the main company toward establishing the business, and the training to operate it successfully.
- There are lower start-up costs since the business idea was already developed.
- They are buying a name and brand that is recognized by the public. So they have a big advantage over starting a business from scratch, as they already have an established customer base.
- A franchise gives more security from the beginning. New independent businesses are known to have as high as a 90% failure rate, often causing the business owner heavy losses and at times bankruptcy.
- When you start a business from scratch, you spend huge amounts of time trying to operate the business without being successful because you may not have the necessary skills for that particular area. When you purchase a franchise, all the necessary groundwork has been done already. In addition, the franchisee gets training and head office support from the franchisor; this may be essential if the franchisee is new to running a business and has no experience or business knowledge.
- The franchisee gets the support of national marketing which a small business would not normally be able to afford. In some cases of larger brands, they may have customers waiting for their doors to open (for example in a new McDonalds).
- Since all the product selection and the marketing have been already developed, you simply have to take care of the daily operations of the business. Your goal will be to grow from an established foundation and expand from there.
- The new franchise owner gains many benefits from the association with the main franchise company. The franchisor offers a great deal of business experience that would take years for the average business person to acquire .
- There are a lot of part-time franchising opportunities, which are perfect if someone has a small amount to invest and wants to support themselves and maintain their investment. They may be able to sell the franchise to someone else once they no longer wish to run it.