13. Franchising

FRANCHISING 13

Good planning, financing and management are essential to any type small firm. This is true whether the firm is a franchisee, a newly  crated firm, a an established firm under new ownership. That franchisees have a lower failure rate  than other new small businesses is due in most cases to the managerial assistance  provided by the franchisers. Failures can occur in any type of small firm when management  does not apply  continued good practice in the operation of the firm.
Franchising became very popular  in the decade of the 1970s, and this growth has continued in the 1980s. Franchising is basically a system for distributing products or services through associated resellers. The franchise gives rights to the franchisee to perform or use something that is the property of the franchiser. The parent company is the franchiser. The small business owner who byes a franchise is the franchisee.

The objective of franchisees is to achieve efficient and profitable distribution of a product or service within a specified area. Both parties contribute resources. The franchiser contributes a trademark, a reputation, known products, managerial know-how, procedures, and perhaps equipment. The franchise invests capital in the purchase of the franchise and provides the management  of the operation in accordance with rules set down by the franchiser. Marketing procedures may be specified, and a common identity is established.
Most franchises can be classified into one of the three categories that follow:
- straight – product –distribution franchises. Under this type of franchise, which is the most  popular today, franchisers merely supply the franchisees with their products in salable form and the franchisees sell them  in that same form. Auto agencies and appliance shops are prominent examples. The franchisers earn their profit from the price at which they sell to the franchisee.
- Product – license franchises. In these cases the franchisees use the franchiser’s name but manufacture their products to comply with the franchiser’s requirements. The franchisers provide brand identity and usually specify methods of manufacturing and /or distributing the product.
- Trade – name franchises. Under this type of franchise, the franchiser licenses its trade name  to the franchisee but seldom exercises any control over the product or service being marketed. Equipment distribution often use this method of franchise.

Franchising offers its maximum advantages when undertaken with due consideration for the interests  of the franchisee as well as the franchiser. The following table lists advantages to both parties.

To the franchiser
1. Expanded distribution without increased capital investment.
To the franchisee
1.Sound management procedures, training, and decision –making assistance made available by franchiser.
To the franchiser
2. Marketing and distribution costs shared by franchisee. To the franchisee
2. Reestablished promotion and advertising programs provided.
To the franchiser
3.Some operating costs may be transferred to franchisee. To the franchisee
3.Being part of large system of retailers.
To the franchiser
4. Flat fees often  collected each month from franchisee. To the franchisee
4. Possible financial aid for part of purchase price at low interest.
To the franchiser
5. Retains quality control of product via franchise agreement.
To the franchisee
5. Credit available in buying inventory and supplies.



Some disadvantages of franchise also exist. These include the following:

To the franchiser
1. Long distance control over franchisees.

To the franchisee
1. Usually gives up much freedom in management decisions.

To the franchiser

2. Expenses of training supervisory personnel and keeping them on the road.

To the franchisee
2. Obligatory purchases from franchiser, even if better  prices are available elsewhere.
3. Profits always shared with franchiser.
4. Franchises have become very expensive.



Despite the great growth and popularity of franchising in recent years, it should be noted that that  not all franchises have been successful. Great care should always precede  any decision to buy a franchise.
It is obvious that franchising has taken an important place in the small  business field in this country. Many American franchisers have extended their  franchises around the world. This significant  development, when handled with proper consideration for both parties, can provide real advantage to both franchiser and franchisee.