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Running Head: DISADVANTAGES OF FRANCHISES 1

DISADVANTAGES OF FRANCHISES 16

Disadvantages of Buying a Franchise and Setting up A New Business

Student name

Melek Simge Belge

Professor

Youngho Lee

Course

Business Research

Abstract

The franchising model is one of the aspects that has been identified to be a successful option while none is trying to initialize a business. However, the aspect only favors the businesses that can withstand the challenging environment and business world. It is considered an optimal way of selecting when the business owner has just begun his operation s with a lack of experience. The post below has worked towards providing more depth about this matter. It summarizes the main advantages and disadvantages of choosing a franchising model to initialize a business. A qualitative analysis of the potential weaknesses that may arise within adopting this model and, finally, a conclusion of the disadvantages of selecting franchising when starting a business.

Introduction

For the past few decades, the business world has experienced slight challenges in small, large, and medium firms. The challenges include the Asian financial crash, global economic fluctuation, and recession in the economy due to the emergence of several global pandemics. The most significant issue is the competition happening both internally and externally in the market environments. The competition has impacted the success and failure of small businesses both directly and indirectly. In this case, franchising is considered an effective arrangement of corporations that generally survives issues such as economic turbulences. . it also generates high rates in business success rate where most of the organizations utilizing the model have found means to survive the emerging issues in the market. Franchising is a popular concept that has a significant t role in the economy. Business experts have emphasized that franchising is an excellent platform for corporations formatting; the format could be the most efficient method for expanding national markets (Mazzaro, 2020). Nevertheless, the franchising industry has continued to experience various challenges regarding the economic and political climate. Franchise perspective should carefully consider the advantages and disadvantages of utilizing the franchising model as a tool for starting a business.

Top ten worldwide franchises	Industry	country
McDonald's	Food	USA
Kfc	Food	USA
burger king	Food	USA
Subway	Food	USA
7-eleven	Convenience store	USA
Hertz	Car rental and dealer	USA
pizza hut	Food	USA
Marriott international	hotel	USA
Wyndham hotel resorts	hotel	USA
Hilton hotel resorts	hotel	USA

Topic

What Are the Disadvantages of Buying a Franchise Comparing to Setting up A New Business?

Reason for choosing the topic

The topic is marked by an excellent research framework and a comprehensive business analysis approach. This case depicts the high note value that demarcates between setting up a new enterprise alongside narrowing down into Franchise. Importantly, it illustrates the system of management and the involved infrastructure. In this case, it gives a narration and analysis of day to day activity, which is essential in the decision-making process. The research topic also provides the parameter of a high success rate and the best infrastructure to adopt (Kinch & Hayes, 2019).

The key factors to the growth of global franchises

Strong recognized brands internationally.

Franchises consist of popularity and strong brands that are well known globally. The factors are critical for the business's success, which makes the model appealing for most of the global entrepreneurs. Consumers retain the royalty on services and products offered by a brand with a reliable name and trademark on higher regard; for instance, the top 100 franchise report recorded that the KFC Sanders's mascot is popular w2ell recognized around the world. Effective management of a brand assists the top operations of franchises in maintaining the consistency and integrity of their brands (Hool, 2019). The same quality of products and services is provided in the same communication message whenever it is located worldwide.

Comprehensive training and ongoing support

The top 100 global franchises reports stated that the leading organization considers the importance of intensive training and continuous learning. The delivering of franchise training and support is effective at enabling the transfer of organizational related knowledge. The businesses utilize the knowledge to build an increas3ed potential of their business success. Robust technical and business training is essential in ensuring that customers are provided with excellent quality products and services, enhancing the likelihood of success of their franchise unit. The report stated that companies such as subways deliver training in areas of their operations. They educate about business guidance, foodservice training, and follow-up support from an expanded network or headquarters and regional individuals. Skill development and the level of training is one of the key aspects that form the difference in the top 100 franchises.

Adaptability and innovation

It takes innovation and adaptability to the existing market to ensure the success of franchises corporations. For instance, the leading service restaurant chains regularly offer new options, including new topping, healthy options, fillings, and new pieces of bread. Pizza hut introduced wing street restaurants due to the rising popularity among customers who preferred chicken wings. They also later introduced quality pasta since the clients had become more conscious of their health. Expansion into the global markets can be effective if the target customers are researched and implement plausible strategies. A franchise corporation is required to have the ability to adapt to the varying cultural differences in different global markets and have knowledge of current trends. Markets in places like Saudi Arabia do not embrace consumption or pork i=since Islamic laws prohibit it. A franchise should be aware of such restrictions and provide products where they are widely accepted; McDonald Company in Saudi Arabia do not sell pork products in such an environment. In Indiana, there are strict laws that are related to food preparation. The company implemented a system where their meat products and vegetarian meals could be prepared in separate restaurants. The chefs mandated to prepare vegetarian dishes were ordered to wear green aprons to adhere to the local policies.

Where entrepreneurs prefer a franchises model in their business operations

Minimized business risks and a lower rate of failures

One of the franchises' benefits is that there are limited chances of failure if fully established compared to independent small businesses. This is because the initialization process of a new business needs one to learn from mistakes. However, franchises can directly start enjoying the profits of established products and the name of the company brand developed by the franchisors in process marketing efforts. The low levels of risks in a franchiser corporation reflect on the original company that is conversant and already resolved the systems and procedures' challenges. In reference to MacDonald as an instance, one of the company key success elements is that every franchise must utilize the company's recipes, trademarks, logos, menu items, display signage, and restraint layout with the standard quality delivered. It also demands the uniformity of all the products produced. As a result of the needed standard, franchises have been saved from learning from their mistakes and errors, increasing their chances of success.

Energy and time saving on marketing and product development

Entrepreneurs prefer franchises in the business since it helps the business owner save a huge amount of energy and time developing, exploring, and operating a new system. Franchises create a platform where the owners do not require to start by scratching. Since the business already exists, there is no demand for goodwill since every aspect is in place and already operating. Since the trademark, reputation, and brand of the products already exists, the franchises could easily start their own business operations by delivering licenses to market products holding a brand that is familiar with the consumers from their franchisors. The majority of the common and popular franchises recognize their brand name and have developed a loyal retention evil among consumers. Examples of such organizations include McDonald's and Starbucks, which have the same brand name and quality products that enable the franchisee to venture to the business with a ready market.

Lower costs in advertising and supplies

Business individuals also prefer to work through franchises since the optimally assist in reducing costs. Cost is cut through combined power by all the franchisees to discounts on strategies to help attain discounts oversupply of raw material. Lower costs of raw materials and other productivity necessities are assessable because the quantities and size of orders are often huge, and thus suppliers have every reason for discounting. Lower cost gives the franchises a big advantage and steps forward ahead of their competitors since they can reduce their expenditures on a continuous basis. Another advantage of reduced cost t is that the franchise benefits from procurement set-up against procuring supplies independently. There are saved cost in buying supplies and the expenses spent in implementing advertising strategies. Several companies allow their franchisees to utilize their brand name while advertising. Besides, the franchisors are also in a position to offer local and national advertisements. Thus the franchisees do not need to pay a large amount of money for advertisement costs than independent individual enterprises.

Easy access to fund rising

Business individuals are attracted to franchising due to the easy access of finding’s that they utilize to expand their businesses (Baresa et al.,2017). It is easier to acquire fiancés with a low risk of losses after investment compared to independent firms. Low risks allow financial institutions to be more willing to provide money for buying a franchise business rather than starting a new and unknown business. The ready market and presence of penetration in the market lower the risk associated with franchise organizations. The possibility of businesses failing is further reduced because there is an improved competitive advantage. Entrepreneurs prefer a situation where there is a captive market for services and products and reduced overhead and administrative costs. This implies the extent to which the risk is reduced facilitates easier funding from financial institutions that include banks.

Presence of business support and training

The franchisor usually provides assistance in case someone considers re-opening a franchise. The individuals are given moral and financial support and advice on the best locations to effectively manage their business. Training is offered on the business marketing strategies that have led to its success. The franchisors provide a platform where the business starters can contact them if they experience challenges while running their business. Support is delivered, focusing on strategies to help determine the appropriate inventory for stock while opening the business. These forms of benefits and support are included under the franchise agreement. Franchisors continue to provide exclusive training for the started business in aspects such as business controls, quality standards, product protection, and managing employees' strategies. Franchise headquarters will deliver all the necessary information about the technology involved, accounting processes, and marketing approaches to enhance the business's success.

Factors to consider while buying a franchise

One should consider the demand of products owned by the franchisee before agreeing. It is crucial to assess the market since not all products in a certain place will work in another. Research on the market and demand is essential before jumping towards a business opportunity. The business individual should assess the potential expansion factor if the business intends to operate under several branches. Before opening up a business, evaluate the records the business is looking forward to merging with. The best companies are the ones that have demonstrated their effectiveness for franchising business. The entrepreneur should be in touch with the existing franchisees and discuss their experiences with the organization (Tien et al., 2016). Another factor to be considered is investment opportunities. One of the greatest con of a franchise is the barrier to start an individual business. A sizeable segment of the initial capital should go to the franchisor as initial fees for training and services are delivered. The entrepreneur should evaluate what the company will deliver in exchange for the paid fees; assessment is critical since some companies will take more time before earning upfront profits.

Competition of the franchisor products should be considered. Although the Franchise is a popular and known brand, numerous franchisees may operate under the same vicinity and other rival organizations. An individual should consider if the industry and Franchise selected is a strategic enterprise to merge with, or it won't be easy to establish in an environment with many competitors in the market. However, competition may fail to be an issue if the product sold is unique. Another factor is training. Companies offer training and support to their franchisees to those who do not have entrepreneurial experience. It is recommended for one to choose a franchise that is willing to offer substantial training. Restrictions are another factor that should be considered by the business person. Some companies impose restrictions on how their associated franchisees should run their operations. They usually require them to follow the standards and guidelines encompassing aspects to do with prices, product offerings, operational hours, and store designs. It is possible for the entrepreneur to be the boss but generally not have full control of the business. A good franchisor should be in a position to create an appealing and comfortable environment for interested franchisees.

Disadvantages of franchises

Profit-sharing and franchise fees

There are variations of fees and capital among different franchisors. In most cases, the franchisees usually pay the start-up cost fees for the copyright of using the brand name. Other costs involved include the preparation and site purchase, signs, constructions, equipment, fixtures, training, and management assistance. They are also required to pay the royalty fees. Other franchisors also demand a section of all monthly gross sales back to the parent company. The fees include a percentage of total gross sales, which are set minimum. For instance, the Krispy Kreme franchisee fee stands at $5000 and the royalty at %5.5 percent of each sales unit. Franchisees must make the payments on time even if they fail to make any sales and earn a profit.

The required investment for food restaurant franchises

Market saturation

Franchisees should be aware that market saturation is a reality and a threat since some franchisors offers territorial protection, and the majority does not offer. They may decide to set up additional new franchisees to close the existing ones (Wiśniewska et al.,2019). Franchisors expect to see significant growth from the franchisers to maintain the quality of their brand. There should be less market saturation in personal service industries and businesses. The largest issue with the growth of franchising is inefficient satisfactory market locations.

Less freedom

After buying a franchise, there is little room for creativity and innovation. One of the main disadvantages of buying a franchise is that the business must conduct all its operations their way. When the franchisee gets in to contract with the franchisor, they agree to sell the franchisor's products and services guided by the prescribed formula. The franchisee contract contains restrictions on how the franchisee should run the business and does not usually allow for any changes or adjustments. Franchisees can become dependent on their franchisors; those willing to become independent should consider business ownership and not opt for Franchise.

Weaknesses

Control of management

Based on the transaction cost theory, there exist some policy issues occurring between headquarter and franchisees. The challenges are brought by operational control, decision making, and incentive as well as design mechanisms. When the Franchise is a well-known brand, the headquarter demands more control to prevent franchisees from having freedom. They focus on differing the operation and management processes; this results in a lack of credible commitment and communication between franchisees and their franchisors and may result in uncertainty of management and increase the cost of business transactions.

Disputes between franchisees and franchisors

There is a similarity between the relationship of principles and agents and that of franchisors and franchisees about the age theory. The issues mainly arise from goal conflict among the two parties. The issues arise due to different risk preferences, risk attitudes, and different views while making decisions. Franchise organizations are prone to covert action, moral hazard, and adverse selection. There are cases where franchisors hide some information before concluding the contract with franchisees.

Resource allocation

the resource scarcity theory illustrated that the relationship between franchisees and franchisors is mostly due to different approaches and operational considerations and adequate capital resources. Such a case example includes a situation where franchisors adjust their main marketing systems due to limited resources. However, the newly implemented strategies may not match with franchisees' expectations (Tran, 2018). The willingness to implement changes can lead to deterioration of the relationship between franchisees and franchisors.

Bibliography

Susan, W. (2020). Retrieved from https://www.thebalancesmb.com/should-you-buy-a-franchise-aa

As Susan Ward has outlined in his article, a typical entrepreneur should evaluate and the most effectively assess the model of starting a business. In her argument, the author gives the negative effect that comes along when buying a Franchise. Despite the high success rate associated with this process, the business owner fails and lacks the franchisor's capacity share. In this case, one can be forced to work on assumptions and procrastination when making predictions. On the same note, the business's running is based on the business agreement's strict articulation. In this regard, there is reduced innovation, invention, and creativity in general. There are challenges in the sharing of profit as well as decision-making processes. Practicing sound principles of management is affected by restrictions issued. Business existence is affected by the operation scopes, capital return, and procedurals outlined when acquiring a trade and employment license.

Expected outcome

Upon research, the expected outcome should be a detailed result that is critical and profound when making the right decision. As an entrepreneur, the study's development should give an accurate picture of starting up a new business compared to Buying a Franchise. Starting a new business has more advantages since the entrepreneur has the data and logical execution formulas that will grow (Kinch & Hayes, 2019).

Conclusion

After evaluating the small and franchising business, it is apparent that a franchisee should consider starting and running his own business at low risk compared to small business owners. They can conduct market penetration easily through a strongly recognized brand. He can acquire quality raw materials at low prices since he bargains power to negotiate fair prices. However, a private business owner will be forced to spare more efforts to establish the first brand and increase product awareness. The process can be difficult due to less competitive power in marketing and advertising. The private owner will also have limited access to negotiating raw materials at low prices and provide good quality products with expensive raw materials.

The research can conclude that franchising business cannot be preferred to private businesses. The franchisee is recommended to start their businesses to avoid restrictions to conduct codes for running the business. A private business is flexible in management, which is a crucial factor for business success and survival. Nevertheless, they cannot extricate from specific standards and control offered by the franchisor. A small business owner has autonomy over his own business as he can lay out the rules for himself.

References

Mazzarol, T., & Reboud, S. (2020). Work Book: Franchising and Legal Issues for Small Firms. In Workbook for Small Business Management (pp. 127-133). Springer, Singapore.

Hool, C. (2019). Are your Franchise wise?. Journal of Aesthetic Nursing, 8(2), 90-91.

Baresa, S., Ivanovic, Z., & Bogdan, S. (2017). Franchise business as a generator of development in Central Europe. UTMS Journal of Economics, 8(3), 281-293.

Liczmańska-Kopcewicz, K. The image transfer in the franchise system: The conceptual approach.

Tien, N. H., & Ngoc, N. M. 2016 Comparative Analysis of Advantages and Disadvantages of the Modes of Entry the International Market.

Wiśniewska, A., Liczmańska-Kopcewicz, K., & Jagielski, M. (2019). The image transfer in franchise system-the conceptual approach. Marketing i Rynek, (5), 13-20.

Tran, T. T. D. (2018). Using arbitration in resolving franсhise dispites: advantages and disadvantages. In Сравнительно-правовые аспекты правоотношений гражданского оборота в современном мире (pp. 690-699).

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