Franchising: Advantages, Disadvantages, and Challenges

This report discusses the advantages and disadvantages of franchising, including an established business, known brand, simpler business financing, business relationships, support and security, high profit, no control, tied to suppliers, encroachment, risk from others, and lack of variety. It also covers the differences between being a franchisee and an independent owner, common mistakes when buying a franchise, and financial challenges and obligations. Finally, it explores the impact of future developments on a franchisee. The report is based on the example of Dominos and is relevant to anyone interested in investing in a franchise.

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Table of Contents
Introduction...........................................................................................................................................2
Advantages of a franchise......................................................................................................................2
Disadvantages of a Franchisee...............................................................................................................3
Being a franchise instead of an independent owner...............................................................................4
Buying a Franchisee..............................................................................................................................6
Impact of future developments on the Franchisee.................................................................................7
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10

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Introduction
Franchising can be defined as a form of business where a franchisor (an individual or
a company who own a franchise system) allows a franchisee by granting a license, the right
to use the brand name and operating system of franchisers for the payment of an initial
franchise fee. In return, the franchisor receives a share of the income of franchisee which is
also known as royalty. The license to use the brand name is contractual and for a fixed
period. Franchisee provides a well-established brand name and resources to use without
making any efforts related to the marketing of the product. It is different from an independent
business in term of both, negative and positive manner (Adezia, Azizi & Marissa, 2017). This
report describes the main problems, which can be associated while shifting from an
independent business to the franchise. It would also explain the legal and financial challenges
and obligations along with the impact of future developments on a franchise. All information
has been collected from the authenticated sources and website of a well-known franchisor
Dominos, for which a franchise has been proposed to purchase. In the end, a conclusion has
been drawn to provide an overview to the report and to summarize the main findings of the
entire study.
As food industry is one of the fastest growing industry in all over the world, any
investment made in this industry can never fail if it is done after analyzing the customers and
the market conditions. This report shows the difference between an independent business and
running a franchisee outlet along with the advantages and disadvantages for the person who is
going to invest in it.
Advantages of a franchise
A franchise is surely an appealing option in form of a business structure. It is a better
choice for those looking for a good business without taking risks on their own.
An established business: A franchise provides the benefits of operating under the name of a
well-established business. The brand, ideas and operating functions and techniques are
already tested and tried and are in a state to be implemented repeatedly at new locations.
A known brand: Operating under the control of a franchise allows a franchise to take benefit
of the already established brand of the company. This indicates that there would be far less
cost and work involved in trying to build and establish on the brand of the business. It will

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already be trusted and known by the customers and therefore it is required to be produced a
steady stream for the customers loyal to the brand. It also involves advantage of the registered
trademark, which ultimately affects the cost invested by the owner (Alpeza, Erceg &
Oberman, 2015).
Simpler Business Financing: One more advantage of a franchise is the fact that acquiring
the fiancé for business becomes generally easier. Investors prefer to invest in a business with
secure brand name, established network and efficient support structure. In some occurrences,
finance can be acquired for the franchisor to make the more simple life of the new business
(Baresa, Ivanovic & Bogdan, 2017).
Business Relationships: The franchise can also enjoy the advantages and benefits of the
various business relationships established by the franchisor. The person who is taking
franchise would not need to incur any extra cost of advertisers and marketing teams.
Managing suppliers would also become easy because of already established terms and
conditions (Buljubasic & Boric, 2014).
Support and Security: Resource Acquisition theory of franchising states that, Franchises
offers the benefits of a security and support system. Franchisors tend to offer support services
like training schemes, management of accounts, advertising and campaign, sales, marketing
and more. The cost of this service is often included in the franchise fee (Varotto & Neto ,
2013).
High Profit: If the franchise is taken from a successful and well-known brand, then it tends
to attract a large number of customers in comparison to a local shop. Especially in the food
industry, customers prefer to choose the best and hygienic food for themselves. Dominos is
providing its services in form of hygienic food products from a very long time and thus, there
are more chances to attract the customers (Dada & Watson, 2013).
Disadvantages of a Franchisee
Similar to any other business model, the franchise business model also has some
major disadvantages which are required to be considered before making an investment in a
franchise. These disadvantages can be understood as follows:
No Control: As per the agency theory of franchising, the very first and most important
disadvantage of a franchise is that the franchise has less or no control over the business

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operations and activities. The rules for operating the business are already mentioned in the
franchise agreement. Therefore, it is not easy for the new franchisee to operate outside the
established borders (Dada, Watson & Kirby, 2012).
Tied to suppliers: While operating a business, no one would like to keep the cost high.
Thus, it is required to find the cheapest suppliers to maximize the profits by minimizing
overheads. Being a part the of the franchise network, the new franchisee will be required to
use the supplier network of the franchise. The franchisee will be tied to the suppliers uttered
to it by the franchise agreement (Dant, Grunhagen & Windsperger, 2011).
Encroachment of franchisee: As Dominos is a very popular brand in the fast food industry,
a large number of franchisees operate within a small area which may reduce the chances of
profitability. It is known as encroachment and it is the main reason for diminishing revenue
and increasing competition (Diaz-Bernardo, 2013).
The risk from others: This is one of the major and serious disadvantages that any act
performed by the other franchises would affect the reputation of the whole brand and other
franchises as well. This impact may also have the potential to damage the overall profits and
sales to the franchise (Frazer & Merriles, 2007).
Lack of Variety: While running a franchise, a person cannot provide a variety of products to
the customers or the products which are not provided by the parent company. Thus, the
chances to attract more customers are eliminated in this business. For example, at a Dominos
franchisee, the owner cannot sell sweets as these are not listed in the menu of Dominos. This
prohibits the owner to make extra profits. And if the owner performs any kind of action then,
the parent company has rights to file charges against franchisee (Hodge, Oppewal &
Terawatanavong, 2013).
Being a franchise instead of an independent owner
To run a franchise, the high degree of conformity is required. A franchise is required
to follow the directions of the home office related to marketing, pricing, and product
specificity. Franchisee agreement does not provide the franchiser the power to change the
procedures and product line at any time (Perrigot, Hussain & Windsperger, 2015).
Franchisees often tend to be their own boss. The aim of franchisers is to control the
business but these businesses reproduce a proven model. Franchisees agree to comply with

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the same rule as a parent company and are committed to the same mission. In Dominos, the
rates, norms of delivery, infrastructure, dress code of the employees, billing system and other
operational level activities are same at each branch of the company (Ramirez-Hurtado et al,
2011).
Franchisees are required to be opened on the national as well on international holidays
which prohibits the owner to take any type of leave from the work. On the other hand, in an
independent business, an owner is free to open and close his shop as per his will. There are no
rules and regulation related to timings and holidays. Along with this, the owner can provide
the variety of food as per the changing taste of local customers.
On the other hand, an independent entrepreneur is the king of his business and can run
the business as per the desired rules and regulations without the interference of any third
person. He has rights to decide the selling price, suppliers and terms, and conditions related to
customer service. Along with this, he can change the product line at any time if the existing
products are not providing profitability to the business (Salar & Salar, 2014).
However, independent business requires more time and money to make an investment
in marketing and establishment process of the business. Employees are hired by the owner
itself and their salaries are also provided by the owner which contribute a larger part to the
total expenses of the business. Along with this, chances to get the success of a new
establishment is also less as compared to the franchise as brand loyal customers prefers to go
with their favorite brand irrespective of the other options available in the market at lower
prices. While buying a franchise, the amount paid as royalty is generally very high but it
includes all the expenses related to marketing, infrastructure etc. Apart from the royalty,
franchiser needs to pay a fixed percentage of profit or a fixed amount irrespective of profit (as
per the contract) after deducting charges like the salary of employees, electricity expenses
etc. This monthly fee is also a big amount to pay which ultimately affects the net profit of the
franchiser (Varotto & Parente, 2016).
Along with this, it often becomes hard to leave a franchise due to the hidden charges
and obligations mentioned in the contract. Thus, it is required to check all the clauses and
obligations at the time of finalizing the contract. But in the case of independent business, the
owner can anytime quit his business as per the market conditions and circumstances appeared
to him. He does not need to pay any kind of charges to anyone and also he is not bound to the

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minimum tenure of running a business as in the case of the franchise (Verbieren, Cools &
Abbeele, 2008).
Thus, being a franchiser may provide relief from the unnecessary burden of success
and failure of business and there is no need to frame rules and obligations to run the business.
It is not possible in independent business.
Buying a Franchisee
At the time of buying a franchise, some common and critical mistakes can be
occurred due to the lack of knowledge and negligence of franchiser. Some mot important
mistakes can be described as follows:
Paying too much
Transaction cost analysis theory of franchising states that most of the times the
franchise contracts include hidden fees and charges and after adding those charges, the
franchise seems to generate less profit as compared to the first thought. Thus, it is required to
find out and discuss all the charges like equipment fees, a periodic fee, advertising material
and any other or which the franchiser would be responsible on regular basis. It can help to
make a wiser decision and negligence of this cost can lead to the quick and wrong decision to
which may be proved unprofitable to the franchiser (Welsh, Desplaces & Davis, 2011).
Misleading figures
Sometimes, the franchisors show a profit of the franchise running in the top-selling
area. This may mislead to the franchiser to finalize the contract. As customer rush is different
from place to place and this would have a direct impact on the profitability of the franchise. If
the franchiser agrees to take franchisee on the basis of robust figures then it would be difficult
him to pay the monthly fee as the sales for that area is not necessarily required to be the same
as compared to the top-selling area (Wright & Grace, 2011).
Financial Challenges and Obligations
Restrictive Contracts
Some franchise contracts are set up in such a way which makes it difficult to leave the
franchise by the franchiser. Such a contract may also include clauses like preventing the
franchiser to start their own business or working with rival firms within a certain area and for

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a period of time. These types of clauses are generally written in the contract at such places
which are not noticeable. Thus, it is required to review all the contracts and clauses by the
lawyer before finalizing a franchise deal (Adeiza, Azizi & Marissa, 2017).
Information about the Parent Company
As per the property rights theory of Franchising, one of the major challenges at the
time of thinking of buying a franchise is to find out the exact and real information about the
parent company. The franchiser must analyse and study about the parent company.
Negligence in this area can be harmful to the franchise as it required a huge amount of
investment to buy a franchise. All support activities and opportunities provided by the parent
company should be conformed to the existing franchisers to know the exact profit margin and
regulations of the company in case of less-profit and no-profit situations.
Making unnecessary profits
The franchiser should carefully read the legal obligations related to making
extraordinary profits from the business. It would certainly create a huge penalty in both
monetary and non-monetary terms to the franchise (Baig & Saeed, 2012).
Approval from the government
In case of franchisee of an international brand, it is necessary to take approval from
the government in which the franchise would be located. So, the franchise would have to take
care of the low of the parent company as well as the laws of the working country. Therefore,
it can create a huge challenge to take approval and to run a business by the person who is
taking the franchise.
Impact of future developments on the Franchisee
As Dominos is one of the main market players in the fast food industry, any change in
the food and health habits would directly impact the sales of the brand. Along with this, entry
of any new food company can also impact the sales of the company as customers tend to
check out the different tastes of the same food. However, Dominos has become an
international brand which is almost unbeatable at its place but still changing market
conditions can affect its business including legal charges imposed by the government of

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different countries. The impact of different future trends can impact the business in a below-
described manner:
Healthy options
Most of the young and old generation is trying to improve their health by improving
their food and lifestyle. In near future, it is expected that they would like to have organic food
instead of fast food such as pizza, burgers and cold drinks. This would have a direct and huge
impact on the sales of the franchise. As Dominos does not offer the robust menu to the
customers like salad, sandwiches, and juices, to earn the profit by only selling pizza will be
difficult and this would lead to the minimization of profits (Wingrove & Urban, 2017).
High Prices of Land and Shops
The prices of land and shops are continuously increasing day by day which would
automatically increase the rent for the shops. The increased rent would directly affect the
profitability of the franchise, as it would be deducted from the gross profits.
Running Street Restaurants
The trend of walking restaurants tends to have a bright future as it does not need to
pay any rent to anyone and can reach to a large number of customers. The cost of food
provided by such type of restaurants is also low as compared to Dominos and other reputed
brands. This can impact the sales of franchisee up to a great extent as customers would prefer
to get the food at their place instead of going away for food. So, the sales and the profit
would get impacted as per the emerging rate of walking restaurants (Chirico, Ireland &
Sirmon, 2011).
High Prices
The food products provided by Dominos are generally provided at higher prices as
compared to the local market restaurants. As per the increasing rate of material and services,
the prices tend to rise in future which would not be affordable for all the customers. So, the
trend of rising in prices is one of the most important issues that can harm the franchise and
prevent it to operate successfully in long run (Aliouche & Schlentrich, 2009).
Online booking facility

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Most of the customers prefer to order their food online as it saves time and problem of going
to the restaurant. Dominos is providing online booking services and home delivery services
from a very long time. In near future, this trend would help the franchises a lot in attracting
the customers. The delivery time is also one of the main considerations for the brand, which
makes it easy to attract the customers and to keep them associated with the brand (Alon,
2004).
Conclusion
On the basis of above discussion, it can be concluded that making an investment in a
franchisee can surely be proved a right decision but it should be taken after considering all
the positive and negative aspects. The food industry is a fast-growing industry in which,
operating own business and buying a franchise, anyone can be the good option. This report
concludes the main advantages and disadvantages of a franchise system, which can help in
understanding the future complications with the business. Further, the benefits of franchisee
over independent ownership business have been discussed to clear the shortcomings of the
franchise system. Along with this, the main legal and financial considerations that can be
faced by the franchiser are discussed from the point of view of an international business and
Dominos is an international brand. The situations that can go wrong at the time of purchasing
the franchisee have been discussed to define the concept clearly. All the information has been
collected from the journal articles written by authors on franchising. As the food habits and
market conditions are regularly changing day by day which would have a sure impact on the
franchisee outlet. Such impact of future emerging trends has been discussed on the basis of
the study of market conditions and the changing needs of customers. This report is a short
summary to measure the profitability and loss in the business through franchising as
compared to own business. This report can provide an overview to a person that whether he
should go for his personal business should buy franchisee.

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Marketing, 47(5/6), 790-812.

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