A franchise is an arrangement whereby a business which is independently owned, is also part of a larger organisation which usually supplies its products and goodwill to that operation.
Some examples of well-known franchises include Blockbuster Video, McDonalds and Subway Sandwiches.
Buying a franchise is an option for starting a new business and could provide advantages over setting up from scratch.
One of the premier benefits of buying in to a franchise arrangement is that the products and services of the organisation might already be well known and established. This would save both time and money for the business start-up in having to advertise and largely convey to customers what the organisation does.
Franchises normally sell homogeneous products which are the result of stringent quality controls and purchasing from authorised suppliers. Customers thus, have exact expectations of what it is they will be buying and of the key features of that item.
Franchise Areas
Franchises are in some ways, a form of controlled competition. The central organisation normally grants and individual franchisee exclusive rights in a particular geographical area.
This provides a guarantee to the owner that similar operations will not start business activities within their designated zone.
National Advertising
Many large franchise businesses will take control of advertising centrally and recharge each individual franchisee through their service charge.
This can provide the benefit of national advertising and increased reach for each individual business which they would not be able to afford on their own.
Economies of Scale
Most franchise businesses benefit form economies of scale because they purchase products for all individual businesses together.
In situations where some of the saving are passed on the individual franchisees, they might be in a position where their product costs would be less than what they could achieve if they brought them as an individual business.
Lack of Business Flair
Most Franchise agreements are very detailed and specific on what an individual operation is allowed to do.
There might be controls on what prices can be charged, whether or not additional products can be sold or that certain items must be offered irrespective of how profitable they are.
Such control over the franchise might dampen the business flair of the owner how may want to place they own personality on their particular operation.
They might also be the issue that because the franchise is national, any special offers or promotions instigated by the head office might have varying effects depending where the individual businesses are located.
For example, a promotion on ice cream might benefit those outlets closer to schools or parks, whereas those in business districts may see little or no advantage.
