Franchising A Business: Advantages, Disadvantages, Requirements, And Relationship

Discuss about the Franchising a Business.

A franchise is a right or license provided by the franchisor to another party, the franchisee, providing them the right to sell their products or provide their services under the name of the franchisor. This is a popular method of starting a business. The franchisee generally pays one time franchise fee plus a percentage of sales profit as royalty and in return obtains existing brand recognition, tried and tested products, techniques of running and promoting the operations of business and support of parent company (Mathews 2011).

This file will discuss about the advantages and disadvantages of becoming a franchisor and what can and cannot be franchised. This file will analyse the franchise relationship, the role of ethics in franchise and cultivation of franchising from McDonald’s perspective. This file will consider the personal experiences, personality, and preferences of McDonald’s that helped them becoming arguably the most famous franchise in the world.

McDonald’s Corporation is an American hamburger and fast food restaurant chain operating in restaurants industry and it is one of the world’s leading food service retailers. McDonald’s franchise was founded by ‘Ray Kroc’. McDonald’s mission is “To be our customer’s first choice, when it comes to, top quality products, outstanding service/cleanness and great value for money.” Its vision is “To be the best quick service restaurant experience”. McDonald’s is world’s top fast food chain according to Forbes (2017). McDonald’s has more than 36 thousand restaurants in over 120 countries, serving 68 million customers each day (McDonald’s 2017).

Not all businesses can be franchised. There are few basic rules and principles that help in determining whether a business could be franchised. Franchising a business help in faster growth and expansion, but certain principles are required to be followed by companies to ensure a successful franchise. To establish a successful franchise, the founders require planning thoroughly and showing dedication towards their goals. Companies can implement the procedure of successful franchises, in order to achieve success in their business (Carty 2004).

According to Siebert (2016), a business can be franchised if it can be expanded. Following are the standards for successful franchise business according to Siebert:

1. A practical prototype showing that the concept of franchise work. For the growth of the franchise, prior planning by founders is required. A prototype of franchise assists investors determining the plans of the company and ascertaining the risks, aiding their decision for investing in the franchise.
2. The concept of business is necessary to be marketable. For genuine competition advantage, the business must be adequately different from its competitors. The potential in the idea and ability to appeal a prospective investor is also required.
3. A franchise business cannot work if assistance or technical knowledge of owner is required in day to day activities. A franchise business must be cloneable meaning a franchise owner must easily understand the working of the franchise and all the operating procedures of business are properly documented.
4. After deduction of royalty, the business is able to generate an adequate return on investment. A business requires at least 15 to 20 per cent return on investment after paying the royalty, or else the business suffers to survive in the market. The amount invested by the franchise owner should be secured in order to increase the investment. A higher return on investment increases the number of investors in a franchise.
5. Proper support from the experienced, knowledgeable and committed management team is also required to sell franchises. The support from the top management of franchise increases the trust of investors, proving a sense of security in business.

According to Gagnon (2010), not all businesses could be franchised, basic criteria of rules and principles assist in determining whether franchising their business is better for a particular company.

1. The first criteria for the successful franchise are to determine whether a business can be reproduced. The franchise ability to work properly day to day, without the founder’s supervision is necessary for its success. The requirement of founder’s assistance in daily decisions, reduce the franchise growth.
2. The business of franchise must be profitable enough to attract investors. Generally, people start a business to make a living, pay their debts, and to make some profit before retirement. The concept of the franchise should be profitable for both franchisee and franchisor. In franchise relationship one party should not take advantage of another party and business should be profitable for both parties.
3. The financial stability of franchisor is necessary for starting a franchise. The franchisor requires presenting the idea of the franchise to investors, preparing various documents and providing training to the franchisee. A significant amount of capital is required to invest by the franchisor, in order for franchise growth.

Franchising might aid in rapid growth and development of the business, still, franchising is not a suitable option for every business. The founders should consider the criteria of a franchise, and critically examine whether franchising their business would be beneficial for them along with their investors.

Advantages and Disadvantages

McDonald’s has implemented these principles in business, helping them achieve success in their franchise. McDonald’s franchise has consistency in their franchises. The process of their franchise is easily cloneable. McDonald’s top management provide assistance and support to their franchise owners. The restaurant business is profitable enough to acquire a high return on investment for their investors. The promotion team does worldwide marketing of the products, increasing the numbers of customers. All these principles assist McDonald’s in becoming one of the world’s top franchises.

The franchise has numerous advantages for the franchisor. The key advantages are opportunities to raise capital from the market through franchising. Increase in capital help in the rapid growth of business and generate infrastructure for the company. Growth in franchises significantly increases the production of the company, eventually increasing buying capacity, aiding in decreased cost for the company. The franchisor has the freedom to direct franchise owners for selling only the specific products or get materials from certain sellers for production of the products (Peterson 1990).

The franchisor can add more outlets to get a significant reach over the greater audience. More outlets help franchisor in leveraging their brand. Company’s wider reach with customers helps in instant brand recognition, eventually increasing trademark value of the company. Franchising a company expands business through great boundaries and in different countries, diversifying their customers. Less supervision of franchisor is required in the business because day to day activities are handled by the franchisee with the help of training provided to them by the franchisor. Due to a wider reach of franchises, the company can get a daily insight of diverse customers, helping the company in implementing new innovations for satisfying their desires and increasing customer loyalty (Bisio 2009).

The franchise is an easy way of rapid growth for business but it does not guarantee success. Franchising a company decreases net receipts of a business since franchisor gets paid in royalties and other fees, which are a small part of revenue. Franchisee takes more of the gross revenue from the business after paying the royalty. The franchisor does not have direct management control since franchise owners are not employees. The operations of the business work according to the franchise agreement; however, day to day decisions are left with the franchise owner. The procedure of terminating a franchisee is more complicated than terminating an employee; the process could take time and money of the franchisor.

Franchise Relationship and Cultivation

A franchise owner that does not comply with franchise agreement, additional contracts, or the operation manual, could impact negatively on the brand of the organisation. The customer generally saw a franchised-owned business as being owned and operated by franchisor and actions of one franchise owner could negatively affect the reputation of the whole franchise. The cost of starting a franchise business from the beginning is significantly higher. Communication in every business is particularly important; any sort of miscommunication between franchisee and franchisor could cause failure in business (Chiou 2004). Franchising requires various disclosures and a considerable amount of paper work by the company while registering in other countries (Grossmann 2017).

McDonald’s Corporation operates in the restaurant industry which is the biggest sector in franchise market, holding more than 20% of the market (Herold 2014). According to the PricewaterhouseCoopers (2016), a total economic output of more than 1.53 trillion and 18 million jobs in the United States of America was generated by franchised own businesses in 2001. This represents nearly 14% of the private-sector employment and 10% of private sector economy in the United States of America. And between 75 identified industries groups operating in the franchise business, restaurants industry hold the biggest market share. These statics shows the opportunities of restaurants industry in franchise market. McDonald’s is the world’s number one franchise according to Franchise Direct (2017). This data shows the suitability of McDonald’s corporation as a franchise.

A relationship between the franchisor and franchisee describe as franchise relationship usually termed as ‘commercial marriage’. The details and terms of the relationship generally provided under the franchise agreement, license, contracts and other documents, primarily in the operating manual. A franchise relationship does not consist of a fiduciary relationship between franchisor and franchisee. Both the parties of a franchise have a common brand; still, both are different businesses, interdepending upon each other while working. In order to maintain healthy franchise relationship, the franchisor and franchisee should follow the terms of agreement lawfully and support each other in business.

Franchise relationship consists of trust, mutual respect, commitment to common goal, professionalism, attitude focused towards customer’s needs and high quality of work output. An inappropriate activity of a franchise could adversely affect the business of whole franchise, therefore maintaining a positive franchise relationship is necessary for the success of the entire franchise. Before entering into a franchise relationship with investors, the franchisor should ensure their capability of working towards the goal of the franchise. A franchise owner represents the vision of the whole franchise to the customers; therefore they are required to maintain the reputation of the franchise (Steinberg 2004).

McDonald’s corporation is an American hamburger and fast food chain, founded by Ray Kroc. The motto of Kroc was “Quality, Service, Cleanliness and Value” in a franchise. The decision of franchising McDonald’s restaurants proved to be significantly profitable. McDonald’s follow simple guidelines, helping them become a successful franchise chain (Hoover 2003). Following are the personal experiences, personality traits and preferences of McDonald’s that helped them cultivating the franchise business:

• McDonald’s follow principle of ‘consistency’ throughout their franchise restaurants. There is consistency in every restaurant of McDonald’s in the world, meaning a customer of America finds similarity in restaurants while ordering in McDonald’s of Germany. The familiarity in restaurants is appreciated by the customers, helping McDonald’s growth worldwide.
• McDonald’s develop a strong and efficient process of cooking hamburgers, decreasing the customer’s waiting time for order. The quick service and time saved in ordering were appreciated by customers, increasing brand loyalty for McDonald’s.
• McDonald’s keep innovating new features in the restaurants for the benefits of customers like the establishment of first drive-thru in 1975, helping customers to book their order from their car. The introduction of happy meals, one dollar breakfast, and outsourcing order-taking helped McDonald’s increasing their growth. McDonald’s maintained their goodwill after opening more than 36,000 restaurants worldwide serving 68 million customers each day.
• McDonald’s focus on customer experience (ordering, payment, place to sit) and customer engagement (social media), which help in differentiate them from their competitors.
• McDonald’s is known for changing their menu according to the preference of customers from different countries. For example, while entering in the Indian market McDonald’s removed beef from their menu and introduced new vegetarian hamburgers like Aalo Tikki or Veg Maharaja Mac. This change helped them emerged in the Indian market as a top fast food chain (Watson 2006).

McDonald’s Corporation had enormous success in the franchising business. The business model of McDonald’s is suitable for the franchise overall growth. McDonald’s process of working is efficient and easily cloneable, helping new investors quickly learn its process. McDonald’s provide leadership, help, and support to the franchise owner, increasing their confidence in the franchise. The customer’s reliance increases due to consistency, simplicity, and innovation of the franchise (Vignali 2001).

During the past decade, the worldwide growth of franchising has been remarkable. At the same time, many questionable activities have caught media attention in the market. The requirement of the role of ethics increases, to maintain a good reputation of the franchise in the market. The actions of one franchise owner could affect adversely over the reputation of entire franchise. The ethics of franchise cover the relationship between franchisee and franchisor, avoiding any unethical behaviour of parties. The franchise ethics includes practices and policies of business regarding affairs that are controversial (Preble 1999). Many franchises are part of associations like British Franchise Association or International Franchise Association, who have a separate code of ethics for franchises. Following are the role of ethics in a franchise business:

• The most significant code of ethics is disclosure of truthful information between parties. Both the parties of a franchise must disclose all the facts and details that could affect franchise adversely. The franchisor should not hide any facts regarding franchise from the investors while entering into a franchise agreement. Timely disclosure of the facts by the franchise owner increases the trust of the franchisor. All the disclosure regarding customer’s feedback could benefit the franchise by introducing the products, more satisfying to their customer’s needs (Helin 2007).
• Every term and condition of the franchise should be disclosed by franchisor while signing the franchise agreement, and terms of the contract should be clear and authentic. The franchisor should not enact policies that could affect adversely over the business of a franchise owner. The franchise owner should follow the rules and policies according to the franchise agreement. It is an offense to hide any fact or any key information from the parties, which could affect franchise negatively (Bebchuk 2007).
• Many companies open their franchises in different countries; in that case, the following of code of ethics of the country is required by the franchise. To avoid any unethical activities of a franchise, various countries have a code of ethics to protect their citizens. The role of ethics changes according to various industries, meaning different industries have a separate code of ethics.
• The code of ethics protects parties while termination of the franchise agreement. The code of ethics avoids any unfairness to the parties, in the case of cessation of the agreement. Any illegal act, affecting the party of the franchise negatively, could be avoided by the code of ethics.
• The code of ethics stops franchise owner from misusing the trademark of the franchise, because a negative action of one franchise owner could negatively impact the business of whole franchise or other owners.

McDonald’s operates in restaurants and food industry, requiring them to maintain high standard while serving their customers. For securing the health of customers, McDonald’s operates high standards of security while cooking food. Various safety guidelines are followed by all the franchises of McDonald’s (Min 2011). The role of ethics is different in various industries. McDonald’s train their franchise owners about the procedure of cooking; therefore less supervision of top management is required in day to day activities. The code of ethics for restaurants industry is to provide better working conditions to their employees and protect the environment from pollution (Kaufmann 1994).

Conclusion

Franchising a business could be highly beneficial for a company, but there is no guarantee of success for a franchise. Franchising their business is not suitable for all the companies. Companies require following certain guidelines, helping them to achieve success in their franchise. There are various advantages of starting a franchise like global recognition, rapid growth, and higher profits, but there are various disadvantages as well, like the problem in communication, no direct management and the negative act of one franchise owner affecting the entire reputation of the franchise. To avoid such disadvantages, a healthy franchise relationship is requiring maintaining between the franchisor and franchisee.

McDonald’s has transformed from a single hamburger restaurant into worldwide franchise chain of restaurants. McDonald’s sees the franchise relationship between franchisee, franchisor, and supplier, of paramount importance for the success of the business. McDonald’s does not offer their franchise to big investors or partnerships; instead, they choose people who rely on their franchise as a sole source of income, because ‘Ray Kroc’ believes these peoples are more dedicate to their franchises. Following these principles has been beneficial for the business of McDonald’s, making them one of the top franchises in the world.

References

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