Limitations of Franchise

The franchise helps establish a business relationship between the parent company and any other individual business unit. The parent company is called a franchiser, whereas the individual business unit is a franchisee. Franchising is the process of providing a license privilege to the franchisee to use the parent company’s trademark in return for royalty payment. Some prominent examples of franchise businesses are restaurant chains like Pizza Hut, Dominos, McDonald’s, Starbucks etc. Anyone can become a franchisee to a business provided they have the necessary money to invest and pay the royalty payment. India has witnessed the arrival of many international brands and stores through the franchise business model. 

Contractual Agreement for Franchise 

The first step of establishing a franchise business is a contractual agreement between the franchisor and franchisee. The agreement allows the franchisee to sell products and services of the parent company. With the expansion of Franchise India businesses, many prominent international brands and chains have started operating in India. Most of the chains like KFC, Subway, Starbucks, Barista Coffee, Café Coffee Day etc., are franchises of the parent company.

After the agreement, the franchisee either needs to make a one-time payment to the franchisor or share a monthly royalty amount. The franchise is buying the rights of the business model and using the same mode of operation to run it. It also means that the logos, slogans, signage, and most products or services are the same as the parent brand.

What are the Limitations of Franchise? 

However, there are many limitations or disadvantages to the franchise. While some franchise businesses thrive due to huge market demand, some lay low and become loss-making machines. It limits any creative ability or input in business operation as a franchisee because the parent company regulates everything. The franchise owner needs to adhere to many rules and regulations to run the business successfully. However, franchise India businesses have to work as per the parent company, share a part of the revenue, maintain reputation and all terms and conditions are dictated by the franchiser. 

Limited Control and High Revenue Sharing

• The franchise owner has limited control over the operation and business model. As it is necessary to work as per the parent control’s working system and operation, the franchisee cannot change. 
• The franchisee makes the most important decisions like service pricing, choosing the suppliers, and even compensation, hiring, and training. This gives the independent owner limited control. 
• Operating cost is high to match the product and service quality of the parent company.
• The monthly royalty-free means the franchise owner does not get 100% of the income generated.Even if the franchise is not performing well, the franchise still needs to pay the parent company’s loyalty fee.

Big Investment in Starting a Franchise 

Although it is a low-cost way to expand the business, many investments and expenses need to be taken care of as a franchise owner. Here are some areas to ponder upon for starting a franchise business. 

– Creating a solid business plan proposition and conducting financial analysis.

– Development of all the necessary legal documents.

– Development of a franchise operation, quality control documents and marketing plan

– Conduct market research to understand if the franchise is the right fit in a particular area

– Creating a franchise legal entity and negotiating third party vendor agreements

– High sales expenses as well as long-term expenses on procurement and set-up

Litigation Issues for Franchise 

Franchise businesses are always scared of litigation and massive lawsuits. The franchise’s parent companies are big businesses, and hence as a franchise owner, it is necessary to adhere to the commitments. Most franchising business contracts are one-sided in favour of the franchisor, making successful litigation difficult for the franchisees. This means most contracts require the franchisor to be solely responsible for many things or any mishap happening in the franchise. 

Image and Reputation of the Franchiser 

The franchiser also has certain limitations when it comes to providing a franchise. If the franchisee does not maintain the appropriate standard and quality of service, the parent company’s reputation is at stake. The franchise operates with the logo, name and trademark of the parent company and hence the reputation and image are always at stake. Anything wrong in any franchise for the brand can completely tarnish the image. Therefore, franchisees always have to be vigilant about brand reputation and take all necessary means to maintain the overall reputation.

Conclusion

The franchise business in India has helped bring many international brands to come and expand themselves and the economy. While a franchise is a great way to start a business based on existing operations, it does come with a few limitations for both the franchisor and the franchisee. The franchisee has limited control over the business in operations, training, hiring, approving suppliers, business model, and overall management. Also, setting up a franchise is expensive, with a lot of legal paperwork and documentation required. The contracts even create litigation issues for the franchisee. The franchiser’s reputation is also at stake if anything happens wrong in any franchise.