Franchising is one of the few means available to access venture capital without the need to give up control of the operation of the chain and build a distribution system for servicing it. After the brand and formula are carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their franchisees while reducing their own risk. While there is also risk for franchise buyers, failure rates for franchise businesses are much lower than those of independent startups.
Franchisor rules imposed by the franchising authority are becoming increasingly strict. Some franchisors are using minor rule violations to terminate contracts and seize the franchise without any reimbursement.
Franchising brings several advantages and disadvantages for firms looking to expand into new areas and foreign markets. The primary advantage is that the firm does not have to bear the development cost and risks of opening a foreign market on its own, as the franchisee is typically responsible for those costs and risks. This puts the onus on the franchisee to build a profitable operation as quickly as possible. Through franchising, a firm has the potential to build a global presence quickly at a low cost and risk.
A primary disadvantage of franchising is quality control. The franchisor wants the firm’s brand name to convey a consistent message about quality and service to consumers. A negative experience at one franchise may lead customers to assume similar issues exist at other locations. Distance can make it difficult for firms to detect poor-quality franchises. One way to address this challenge is to establish extra subsidiaries in each country or state where the firm expands. This creates a smaller number of franchisees to oversee, reducing quality control concerns.
At the time of signing a franchise agreement, it is advisable to have legal guidance. Salma Shnain Almazrouie & Legal Consultants has experienced advisors in this field who can explain the rights and obligations of each party to ensure a clear and fair agreement.