Advantages and Disadvantages of Franchising
Franchising allows a business to expand its operations and grow geographically. Unlike a chain system, the franchisor does not have to provide capital, management or employees for each location. This allows a franchisor to increase its profits more rapidly than by expanding on its own.
The franchisees, as individuals who own their own business, have every possible incentive to work hard to make their businesses a success. Because they are owners, their motivation is likely to be greater than that of a manager, even one who receives a percentage of the profits of the business.
With each new location, the franchisor immediately earns a profit in the form of the initial franchise fee, typically $5,000 to $25,000. The franchisor also receives a continuing royalty, usually 8% to 10% of the gross income of the franchisee.
One disadvantage is that after franchisees have learned how to operate a business they resent continued royalty payments. In some cases, they look for a way to terminate the franchise contract. In other cases, they may try to violate the terms of the franchise arrangements because they believe the franchisor is receiving more benefits than it deserves.
Another disadvantage is that the franchisor may be named in litigation involving the franchisee. Typically, this occurs when the franchisee is sued for injuries to its personnel or customers or for various types of alleged discrimination. In these circumstances, if the franchisor has not detailed how the franchisee should act in the particular area affected, the franchisor has usually been successful in defending the lawsuit.
After considering the advantages and disadvantages of franchising, it would appear that the benefits of franchising far outweigh the disadvantages. Based on these and other factors, it appears that almost any business would benefit from
- ^ e.g. New York (a minimum of seven days prior to use)- 13 N.Y.C.R.R. 200.09.
- ^ e.g. New York (annually)- 13 N.Y.C.R.R. 200.08; Maryland (quarterly)- Code of Md. Regulations, additional Title 02, Subtitle 02, Chap. 8, .02.02.08.14.
- ^ 16 C.F.R. 436.1(g).
- ^ e.g. New York (the earlier of (a) the first personal meeting with the franchisee to discuss the franchise or (b) ten business days before the franchisee signs any binding agreements or pays any money)- 13 N.Y.C.R.R. Loc. 4 (iii).
- ^ See Walters v. Ramada Franchise Systems, Inc., 2000 Tex. App. LEXIS 5673 (Court of Appeals of Texas, Fifth District, Dallas August 24, 2000) in which a franchisor was denied summary judgment because it retained some control over the franchisee's operations.