A franchise agreement is a set- up where a buyer is given exclusive rights to sell products of an already established firm. The buyer is called the franchisee and the parent company franchisor. Typically, franchisors give franchisees their brand name to trade with and offer help and support. Similarly, one may be licensed to produce and sell the franchisor’s products with no restriction on how to run the business (Frankoise, 1997). This paper highlights the pros and cons of franchising.
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A franchise is advantageous over a new venture since it has low failure rates. According to conducted research, franchises stand a better chance of success than independent businesses (Coltman, 1988).
Secondly, a franchisor helps in the management of the enterprise; they provide equipment and supplies. In Liz’s case, she may be trained on good management skills while marketing undertaken by Food of Reality. The franchisor may also offer goods on credit and bulk as they have an established relationship with suppliers of goods (Francoise 1997).
Since franchises are firms with established brand names, franchisees enjoy the benefits of their investment (Hector, 2003). Franchisors spend a lot of money in branding and logos. Customers therefore find it easy to identify with the business since their brand is universally recognized. This is similar to buying a business as a going concern.
In some franchise agreements, a franchisor provides the location of the business besides a surety of available customer segment. Here, Liz stands to benefit from the goodwill of the parent company in terms of a ready market, strategic location, and customers. There are high profits that Liz may also reap from a franchise agreement.
Another important advantage concerns advertising. For every new business, advertising is vital. Franchisors cover commercial adverts and campaigns. Liz needs not to worry about advertisement of her products. Before one commits to a franchise agreement, they need to check the success of the parent company (Kestenbaum, 2008).
This is an added advantage since Liz already has a business idea that can be proven. Furthermore, exclusive rights in terms of location benefits a franchisee since franchisors do not allocate more than one franchisee in one territory. In this sense, Liz would benefit from low competition and massive market.
However, this agreement has its downsides. The initial cost of buying a franchise could be very high. Advertising, management, and trademark fees are included in the initial cost. Liz will have to rely wholly on the franchisor. If the franchisor exits the market, she will run out of business as well. Besides, lack of independence in the operations of the business therefore becomes a limiting factor.
Franchising agreement has restrictive terms particularly concerning management of the business. A franchisee is not at liberty to make any changes to correspond to the market changes (Sherman, 2003). Profits reaped from the business should be shared between Liz and Food of Reality. Furthermore, incase Liz wants to sell the business; she needs to have the approval of the franchisor. The buyer will have to be approved as well.
I would recommend that Liz enters a franchise agreement. Clearly, a franchise’s advantages outweigh the disadvantages. Additionally, Liz was a librarian. She therefore has no experience in the business field. To gather this, a franchise agreement would be a good starting point.
Coltman, M. M. (1988). Franchising in the U.S: Pros and Cons. USA: Self Counsel Press.
Francoise, J. (1997). Franchise Agreements within the European Community. London: Transnational Pub.
Hector, E. D. (2003). Advantages and Disadvantages of Franchising. New York: St Lucie’s Press.
Kestenbaum, H. (2008). So You Want to Franchise Your Business. New York: Harold and Knopf.
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Sherman, A.J. (2003).Franchising and Licensing: Two powerful Ways to Grow Your Business in Any Economy. New York: Amacom.