Franchising and Small Business Development: Benefits and Drawbacks

Introduction

From the middle of the 20th century, franchising has become one of the most popular forms of small business origination and growth for risk-averse entrepreneurs, as well as one of the most successful expansion methods for large companies wishing to increase their market presence and enter new markets. This form of business organization has become especially prevalent in the retail and services sectors, where franchise chains are used more frequently than other business structures.

As with any form of business organization, franchising offers advantages to both the franchisor and the franchisee. However, its drawbacks must also be carefully considered when evaluating this business opportunity.

This paper aims to study franchising as a form of business organization and to assess its advantages and disadvantages. The method applied is qualitative research through a review of relevant recent literature. Theoretical bodies of literature were studied to summarize this business opportunity and analyze it using economic and behavioral theory. As quantitative analysis is extremely time-consuming and resource-intensive, requiring access to quality internal data, empirical conclusions drawn from existing studies on franchising outcomes are analyzed and presented throughout this work.

Literature Review

The paper is organized as follows. The first part is devoted to a theoretical and empirical literature review. The second focuses on the main advantages of franchising as identified across the relevant literature. The third part identifies the possible drawbacks of this business form. This is followed by a discussion section that weighs whether the advantages outweigh the disadvantages and considers the conditions under which franchising should be preferred to other business forms. The conclusion summarizes the findings.

Franchising is defined in the literature as a business organization form in which "a business owner (a franchisor) sells the licensed rights to duplicate the business to a business operator (a franchisee) in exchange for a continuing service fee" (Record, M 1999, p. 117). When discussing franchising, it is important to understand the concept of business format franchising. "Business format franchising is the type of business arrangement in which one party (the franchisor) grants a licence to another individual, partnership, or company (the franchisee) which gives the right to trade under the trade mark and business name of the franchisor" (Clarke, G 1999, p. 3).

There are currently over 570 business format franchisors offering investment opportunities in the UK. In the United States — one of the world's most developed economies — franchising sales account for up to 50% of all retail sales. The four main types of franchising include: franchising of a business format or business organization type; franchising a product or service offered to clients; acquiring a licence of the manufacturing type; and franchising a total business opportunity venture.

Buying a franchise is recognized by numerous scholars as an ideal way to start a small business while retaining the advantages of a larger commercial operation. Among the key structural roles, a franchisor "refers to the owner of the business system and any associated trademarks or trade name who allows others (the franchisees) to use these under licence in a designated (but not necessarily exclusive) area, whilst providing continuing support." A franchisee "refers to the party who buys the right (and obligation) to run the business from the franchisor, using the trademark and trading system. The franchisee is essentially self-employed, but must operate the franchise outlet according to the procedures set by the franchisor."

Other noted advantages include better access to financing due to lower risks associated with expanding an already established brand, employee training provided by the franchisor, overall reduction of business risk for the franchisee, external benefits derived from the broader expansion of the franchisor's brand and chain, reduced expenditure on advertising and public relations, and access to the franchisor's wider advertising resources, business insurance, and more. Barrow, Golzen, and Kogan emphasize that "in the U.S.A., for example, McDonald's, one of the world's largest franchisors, spends more on TV advertising than Kellogg's, and virtually the same as the Ford Motor Company" (Barrow, Golzen & Kogan 2000, p. 37). Because the franchisee operates in a market local to them, they are well placed to exploit this insider knowledge and outperform incumbent competitors.

According to Mendelsohn, "Sales in 1997 reached £7 billion, compared with £5.2 billion in 1990, which represents somewhat less than the 50% increase in systems and franchisee numbers over the same period" (Mendelsohn, M 2001, p. 321).

The operations manual provided by a franchisor to the franchisee benefits both parties. "The operations manual is a complete description of all the operating policies, procedures, methods and systems used to run the business" (Clarke, G 1999, p. 30). The operations manual enables the franchisor to ensure that, although each business is independently owned and operated, consistent levels of quality and customer service are maintained throughout the network. A small business considering becoming a franchisor can use the operations manual to illustrate how it wants the business to be run on a day-to-day basis.

Advantages of Franchising

An operational manual may include sections covering: opening hours and days, pricing policies, accounting, advertising, staff duties, payment of franchise fees, stock control procedures, staff schedules and rotas, and cash control and banking procedures. The operational manual is particularly useful to the franchisee in supporting the day-to-day running of the business; it is also updated whenever changes are made to the franchise's operating procedures. A franchisor such as Kentucky Fried Chicken (GB) Ltd. may include in their operations manual: "cleaning routines, recipes, methods of preparation of food, kitchen procedures and customer complaints procedures" (Mendelsohn, M 2001, p. 69).

Mendelsohn further highlights the ability to become a member of the British Franchising Association (BFA) as a significant business benefit for both franchisors and franchisees, granting access to quality and up-to-date business information, advice, and guidance. The BFA is the self-regulatory body for franchising throughout the UK. "The BFA has two categories of membership: full membership and associate membership. Full members meet all the BFA criteria, while associate members are on the whole more recent entrants to franchising who have yet to establish a proven trading and franchising record" (Mendelsohn, M 2001, p. 312).

According to the organization's code, BFA membership provides franchisors with the following benefits: reduced costs on exhibitions and advertising, a quarterly BFA newsletter, franchising-related training and seminar programs, recognition as one of the leading franchisors, overseas contacts, and participation in national and regional meetings where advice and experience are shared. Franchisees are not direct members of the BFA, but prospective franchisees can nonetheless benefit from it. The BFA identifies the names of franchisors that operate in accordance with its standards, helping prospective franchisees make more informed investment decisions.

Conclusion

Franchising represents a compelling option for risk-averse entrepreneurs seeking to start a small business with the structural support of an established brand. The literature consistently highlights its advantages: reduced financial risk, access to proven business systems, operational guidance through manuals, marketing support, and the collective benefits of membership in bodies such as the BFA. While drawbacks exist — principally the loss of operational independence and the burden of ongoing fees — these are often outweighed by the stability and support the franchise model provides.