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Franchisee

Advantages and disadvantages for the franchisee

Understand the differences with respect to a traditional business

The franchisee is the person or company to which a franchise is granted, based on a set of agreed-upon terms and conditions. The list below shows some of the main advantages of being a franchisee:

Advantages:

  • You can benefit from the franchisor's experience, avoiding some of the risks and efforts involved in starting up any small business activity.
  • Reputation of the brand: Belonging to a well-known chain, easily identified by the consumer.
  • Generation of economies of scale: One of the main advantages are the low prices that can be obtained thanks to the high purchasing volume of the franchisor's head office.
  • Exclusive product.
  • Assistance, supervision, training, management system, market research studies, etc.
  • Marketing: Savings on marketing campaigns and greater media impact.

Disadvantages

  • Payment of a front-end fee for use of the franchised brand and for transmission of know-how, as well as payment of royalties for all of the ongoing support and advice provided.
  • No ownership of the brand: The franchisee may use the brand, but the brand belongs to the franchisor.
  • Limited decision-making ability: the franchisee must adhere to the franchisor's standards and procedures.
  • The franchisor must be allowed to perform ongoing supervision and control of your business.
  • Franchising contracts tend to have a short duration (5 years), which can cause certain problems to arise.

Differences with respect to a traditional business

In addition to being one of the most dynamic and financially affordable formulas for growing a business, expansion through franchising involves the establishment of a contract, which will specify the terms under which transfer of the brand's use rights will take place, how the company's own unique know-how will be made available and passed on, and how initial and ongoing technical and sales assistance will be provided to the franchisee in its role as a commercial partner.

Payments to be made:

  • Front-End Fee: This fee also covers the franchisee's use rights for the brand and ability to benefit from and apply the know-how passed on by the franchisor. This tends to be dedicated to:
    • A front-end fee that covers a series of expenses the franchisor incurs for each of its franchisees.
    • Expenses generated by expansion of the franchising.
    • The initial training provided by the franchisor, and use of the franchisor's facilities for this.
    • Delivery of the welcome package for joining the network (merchandising for the location).
  • Operating Royalty: For the services provided by the head office. This royalty may be:
    • Fixed.
    • A percentage of sales.
    • Mixed.
    • None (incl. in product margin)
  • Marketing Royalty: An amount that the franchisee must pay to the head office for its promotional and communication actions at the national scale.
  • Marketing Fund: An amount that the franchisee must invest for promotional and communication actions at the local scale.
  • Contractual Obligations: Exclusivity of the product/service, sales method, authorized suppliers, remodeling of the location, etc.
  • Contract Duration: Will depend upon the return on investment.
    • e.g.: return on investment > 2.5 years > 5-year contract
  • Renewal: Implicit vs. automatic.
  • Territorial Exclusivity:
    • Area of exclusivity.
    • Area of influence.

Advantages and disadvantages for the franchisee