General > Disadvantages of the Franchise System
Disadvantages of the Franchise System
- Inevitably, the relationship between the franchisor and franchisee must involve the imposition of controls. These controls will regulate the quality of the service or products to be provided or sold by the franchisee to the consumer. It has been mentioned previously that the franchisee will own his/her own business.
However, the business which they own is one which they are licensed to carry out in accordance with the terms of their contract. They must accept that in return for the advantages enjoyed by them, by virtue of their association with the franchisor and all the other franchisees, control of quality and standards is essential.
Each bad franchisee has an adverse effect, not only on his own business, but indirectly on the whole of the franchised chain and as such, all other franchisees. The franchisor, will, therefore, impose standards and demand that they are maintained so that the maximum benefit is derived by his franchisee (and indirectly the whole of the franchised chain) from the operation of the franchisee's business.
This is not to say that the franchisee will not be able to make any contribution, or to impose their own personality on their business. Most franchisors do encourage their franchisees to make contributions to the development of the business of the franchised chain which their individual talent and qualities permit.
- The franchisee will have to pay the franchisor for the services provided and for the use of the system, i.e. the initial franchise fee and continuing franchise fees.
- The prospective franchisee may find it difficult to assess the quality of the franchisor. This factor must be weighed very carefully by the potential franchisee for it can affect the franchisee in two ways.
- A. Firstly, the franchisor's offer of a business-format package may not amount to what it appears to be on the surface.
- B. Secondly, the franchisor may be unable to maintain the continuing services which the franchisee is likely to need in order to sustain their business. These aspects will be discussed in detail in a later chapter.
- The franchise contract will contain some restrictions against the sale or transfer of the franchised business. This is clear inhibition of the franchisee's ability to deal with their own business but, as with most of the restrictions, there is a proper reason for it. This provision is in the contract because the franchisor will have already been most meticulous in their choice of the franchisee as the original holder of the franchise for this particular outlet. Why then should they be any less meticulous in their approval of a replacement? Naturally, they will want to be satisfied that any successor to the original franchisee is equally suitable for that purpose.
In practice, there is normally very little difficulty in the achievement of successful assignments of the franchised business. Some agreements provide for the payment of fees to the franchisor to cover the costs of dealing with applications and training the new, replacement franchisees.
- Franchisees may find themselves becoming too dependent upon the franchisor and fail to produce the personal drive which the system provides. Some franchisees lose their perspective. They delude themselves into believing that the franchisor has a duty to be so involved with their particular business to ensure that it has a flow of customers, and to provide a day-to-day involvement, which is inconsistent with franchising as a concept.
- The franchisor's policies may affect the franchisee's profitability. For example, the franchisor may wish to see his franchisee build up to a higher turnover from which he gets his continuing franchise fee, while the franchisee may be more concerned with increasing his profitability, which does not always necessarily follow from increased turnover.
- The franchisor may make mistakes in their policies. They may arrive at decisions, relating to innovations in the business, which turn out to be unsuccessful and detrimental to the franchisee. This is why franchisors are always urged to market test innovations thoroughly in their own company-owned outlets, and to be able to demonstrate to franchisees the cost effectiveness of introducing new ideas.
- The good name of the franchised business and its brand image may become less reputable for reasons beyond their own control.