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. There is also risk for the people buying the franchises. However, failure rates are much lower for franchise businesses than independent business 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 with it 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, putting the onus on the Franchisee to build a profitable operation as quickly as possible. Through franchising a firm has the potential of building a global presence quickly and also at a low cost and risk.
A primary disadvantage to franchising is quality control, as the franchisor wants the firm’s brand name to convey a message to consumers about the quality and consist¬ency of the firm’s product. They want the consumer to experience the same quality regardless of location or franchise status. This can prove to be an issue with franchis¬ing, as a customer who had a bad experience at one franchise may assume that they will have the same experience at other locations with other services. Distance can make it difficult for firms to detect whether or not the franchises are of poor quality. One way around this disadvantage is to set up extra subsidiaries in each country or state in which the firm expands. This creates a smaller number of franchisees to oversee, which will reduce the quality control challenges.
At the time of the signing of the franchise, it is advisable to have a lawyer, Salma Shnain Almazrouie & Legal Consultants have experienced advisors in this field who are able to explain the rights and obligations of each party to the other.