Franchise agreement is a contract signed by the Franchise and Franchiser that formalizes and specifies the terms of business arrangements.
Advantages of Franchise Agreement
- The franchisee can benefit from the franchiser experience and he can be saved from the cost of bulk purchasing and effective advertisement as well as promotion of business.
- It is easy to start the business because the Franchiser offers the Franchisee the advantage of starting up anew business quickly based on a proven trademark and formula of doing business. For example a well run franchise would offer services such as site selection lease negotiation, training and ongoing support.
- It enables the franchisee to expand his business easily, that is, he can take the business to a level that would not have been without the expert guidance of the franchiser.
- The franchisee is offered training which would not be available to free individuals starting their own business.
- The Franchiser markets and advertises the franchisee goods.
- There is lower risk of failure than for an entrepreneur business because the Franchisee is offering services or products that already sell successfully.
- The Franchisee can be able to predict success from the already operating Franchisees under that Franchiser.
- The Franchiser may also offer management assistance to the Franchisee.
- It is possible to acquire low cost goods and supplies because of the superior purchasing power of the Franchiser.
- The business is based on a proven idea. The Franchisee can check where other successful Franchisees are before committing himself.
- The Franchisee has exclusive rights in his territory i.e. the Franchiser cannot sell other Franchisees goods in his region.
- It’s easier to acquire financial assistance because banks and financial institutions are likely to lend money to buy a Franchiser with a good reputation.
Disadvantages of a Franchise Agreement
- The Franchisee looses the control of the business whereby they are supposed to follow the system and get approval for changes from the Franchiser.
- There is no true ownership of the business i.e. its like renting or leasing.
- It is expensive to start and operate a Franchise business where the Franchisee has to choose and adopt the standards set by the Franchiser. The Franchisee should also pay a fee, ongoing royalties and advertising contribution.
- There can arise conflict between the Franchiser and Franchisee i.e. if either side is incompetent. For example where the Franchisee is incompetent he may damage the goodwill of the Franchiser.
- There may be a risk of the Franchiser failing to maintain a high quality of continued support to the Franchisee. He may also make policies that may be of negative impact to Franchisee.
- The Franchisee Agreement has restrictions on how to run the business this implies that the Franchisee may not be able to make changes to suit his local market.
- The Franchisee may only sell his Franchise to someone approved by the Franchiser.
References
Batty, G. (2001), Entrepreneurship, Virginia, Reston Publishing Co. Inc.
Kilby, P. (2003), Entrepreneurship and economic development. New York, MIT press.
Maccelland, D. (1999), The Achieving Society, London, Cambridge University Press.