Many of the franchising systems have achieved outstanding success The rewards and benefits of Franchising are well-publicized and thousands of franchisees achieved great personal rewards of how Franchising has helped them. As we know, there are always two sides to a story, The same holds for the lucrative franchise companies, As when there is a success, there are also the franchises on the opposite which don’t achieve the same level of success.
The purpose is to provide a simple guide to the risks of Franchising. It is a starting point to ensure you understand the fundamentals of Franchising. So, now let’s have a short overview of what franchising is.
What is franchising?
Do you want to open your own chicken business?, or you want to buy a franchise for operating under a common and hopefully well-known brand just because Franchising is a way of doing business. So, you don’t need to set up your own business from scratch, the franchisor owns the name in a franchise system and brand, and you’re given the right for a limited period to use them as a franchisee. The franchisor may also organize equipment, products, depending on the nature of the franchise, other things, and a lease of premises. You have to pay for these rights.
Not all franchises are the same.
Franchises come in various sizes, forms, and shapes. Some of the franchises offer a lot of support; the franchisee does not obtain support others are set up on that basis. There are different lengths of the agreement, different fee structures, and different terms and conditions. That is why to shop around is important and get expert advice from people who understand Franchising to assist you in determining what suits you and how to get a good deal and if you are getting a good deal.
Franchising can deliver great benefits.
A person who can access a business model that has proven successful in other locations or areas with little or no prior business experience can learn core business skills. From a franchisee’s perspective, franchisees can obtain initial and ongoing training, have access to a strong brand, benefit from group purchasing and collaborative marketing, and have access to the product or technical assistance, acquire unique or distinctive services or products, gain access to sites not normally available to small businesses and save on set up and other costs, obtain business support from the franchiser and other franchisees and obtain finance more easily.
There can be other benefits such as access to franchisor services, administrative assistance, research and development, and benchmarking. Ultimately the franchisor has a vested interest in franchisee success because if franchisees succeed then the franchise system can only be successful,
But there can be disadvantages
There is usually more operational restrictions and less autonomy on franchisees On the flipside of the Franchising, some of the expected benefits may not be as great as anticipated, As there are fees to be paid, or indeed
If the entrepreneur loses his patience during the search for a franchise, then there are chances of going wrong. In such situations, many important details are overlooked or ignored. Even after recruiting a franchisee, there is a hurry to launch the new unit as soon as possible. If such a decision goes wrong, the situation can catapult into a crisis very fast. Before anyone can take any steps, a lot of business might be lost.
The following are the Franchising risk:
Loss of brand equity
A franchise may operate from many locations and is managed by different people in every location. If something goes wrong, the news spread quickly on social media, and the entire brand loses valuable customers.
Though franchises make sure that the franchisees are trained very well, human errors are bound to occur. Sometimes situations are misrepresented while being circulated in various media. There are clarifications regarding the same, but often the damage is already done. We see many old stories being circulated again and again.
The chance of a business getting a bad name from a stray incident is always present. The real danger lies in serious mishaps. Management should be able to send out messages that reassure the community that it is very serious about the safety of the customers.
Litigations
A franchisee uses brand names and trademarks that are registered in the name of the franchise. There are many other links between them if any carelessness on the part of a franchisee in customer care can result in litigations.
Depending on the nature of the case, even the franchisor may be held liable. If proper care is taken by the lawyer while drawing out the agreement, it can be avoided. Litigations prove to be costly in many ways. It also implies attorney fees that may have to be borne, but a lot of business opportunities are also lost. Few businesses want to deal with another business that is entangled in legal battles.
Lengthy legal proceedings require a lot of time that could have been otherwise invested in managing the business.
Employer liabilities
A person working in a franchise unit is indirectly an employee of the franchise business. Depending on the laws applicable and the agreement between them, the franchisor may or may not have employer liabilities. There are many liabilities of an employer towards the well-being of his employees. Apart from benefits such as provident fund and gratuity for permanent employees, there are also responsibilities towards safety. All this does not happen automatically. There has to be a plan in place that can be executed in a timely and regular. When there is an actual verification, all the documents should be ready for inspection.
Franchisees are given adequate training regarding human resource management to ensure that all employees get their rightful benefits. To reduce the chances, franchisors emphasize that underage employees are not to be recruited at all. Hours of employment, shift, rights of workers, and leave entitlement are covered in training before starting operations.
Compliances
There are many regulatory compliance requirements by the Government. Failing to do so can invite a lot of trouble. If a franchisee is careless enough to be found lacking in compliance requirements, even the franchisor will be at a loss. In larger businesses, there may be a need for liaison with the authorities, which may need dedicated time and effort. Employees should be trained in the maintenance of records and validation of permissions required to run the business at regular intervals. These are small things that can be interwoven in the daily or monthly schedule, but they can greatly improve the situation. Once there is a gap on this front for a few months, the costs and procedures involved will escalate greatly.
The abrupt closure of an outlet leads to many doubts and questions in the customer’s mind. When customers do not see any valid reasons for the closure, they tend to lose trust. This is not good for the image of the brand at a local level. The business has to be managed by the franchisee, and a franchisor is exposed to such probabilities.
Capital investment
A franchise business needs a lot of investment to ensure that it is ready for the franchise model. There are costs of marketing the franchise too. After spending enough time and money on converting the business into a format that can give franchise rights, franchisees are brought on board. This is a very delicate period for the franchisor as he is new to operating a franchise business, and the franchisees are new too.
A lot of support has to be ensured for each unit. Every effort must be made to ensure that the unit becomes a success. If anything goes wrong at this stage, franchise plans may have to be stalled suddenly. Even if the plan is resumed at a later date, the capital invested in it will be lost forever without any output.
Franchisors often raise the money needed to convert into a franchise business through bank loans. In case of failing to repay the loan, the franchisor may lose collateral used for the loan. This is a major concern for the owner. There are ample examples where businesses were running fine until there were efforts to scale up the business. In such a situation, there is a high chance that the product or service’s valuable attributes or service were altered so much to enable mass production that they lost the original flavor and hence lost favor as well. If something like that happens, no amount of changes, training, or marketing will bring back the situation to the status quo. Since the investment is made, there is no point in turning back.
Conclusion
Thus, an entrepreneur must be ready to face all the situations that a business may throw at him. It is the rule of the game that profits are proportional to the risk. Every business has some other problems associated with it. Though problems at every level are a part of business, one should be aware of the problems that could arise. Such awareness can prevent them from arising, but it cannot be mitigated.
A well-designed training program creates awareness about all the possibilities of various situations: it also provides training regarding the right response in such situations, ensuring that all the franchisees and their employees undergo such training right in the initial phase of starting a new unit. There should be a provision of manuals regarding the same at all the franchise units. There should also be refresher training for important compliances from time to time so that new rules and regulations can also be addressed.
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