Franchising

Difference between a franchisee and a company owned store within a franchise chain?

A franchisee is an individual who runs an independent business using the intellectual property of a franchisor. The franchisee purchases the rights to use a company’s trademarked name and business model to do business, and must follow certain rules and guidelines already established by the franchisor, and in most cases pay an ongoing franchise royalty fee to the franchisor.

A company owned store within a franchise chain is a store that is franchisor
owned and operated. It is run by the franchisor's employees, in contrast to a franchisee store which is an independent business. Both stores would look same to customer, sell the same products and services, use the same business model, but the major difference is in the ownership. A franchisee may have some signage which indicates that it is independently owned and operated.

The major reason for their existence is that company owned stores allow a franchisor the ability to control and profit from a successful concept. They provide cash flow and a training facility to showcase the business for both the market and other franchisees. Company owned outlets enable franchisor to try new procedures and systems to improve the way things are done . These trials in company owned store ensure that problems are ironed out before new systems are rolled out to franchisees. Additionally they provide a healthy breeding ground for franchisor staff to grow and develop into highly knowledgeable support staff for franchisees which is a good thing for franchisees.

Franchisee vs the manager of a company owned store.

The manager of a company owned store is an employee of the franchisor as opposed to a franchisee who is an independent business owner. Being an franchisee might be more attractive for several reasons.
The scope of responsibility of a business owner exceeds that of a manager an is certainly more attractive to the entrepreneurial mind. Secondly the manager's income is limited to his salary and any bonuses or commissions as established by his employment contract, but the franchisee has unlimited income potential capped only by his ability to make profits.

What is typically provided by a franchisor to its franchisee?

A franchise typically provides a turnkey business; from site selection to lease negotiation, training, mentoring and ongoing support. Specifically a franchisor would provide the following:

Location selection. Some franchisors will help franchisees select a location for their franchisee using their data on viability and competition. Hopefully this will enhance profitability of franchise.

Training and Support. Most franchisors offer training prior to starting the business and ongoing administrative and technical support.

A detailed operations manual is usually provided which gives instructions for carrying out the business and establishes the rules, standards and specifications of the franchise.

Financial assistance. Not all franchisors offer financial assistance but some do have financing programs available to franchisees. This could take various forms including direct franchisor or third party financing.

Advertising. The franchisor may advertise on a scale which will be impossible for a small business' advertising budget.

Corporate image and brand awareness. The franchisee gains instant credibility and goodwill from customers which is an excellent kick start for any business.

Franchising offers an established business model which cuts down on the learning curve.

Though not specifically provided for, there is a wealth of experience amongst fellow franchisees who will gladly share their knowledge and advice additionally an established brand creates ease of raising funds

The contributions of franchisor are most valuable to a nascent entrepreneur as it eases the typical challenges encountered in a new business venture, it is his 'street business education,' shortens the learning curve and its attendant cost and takes a away years from the school of hard knocks which new businesses typically have to go through.

Franchise vs independent business failure rate?

Over the years, studies have emerged with opposing views when comparing “success rates” of franchising to independent business ownership. There is the general belief that failure rate of franchisees are lower. Logic lends credence to this position, because if franchising is simply about duplicating a proven system then it follows that failure rate must be low. However results of an SBA research elicits a different conclusion. The SBA reports, 'despite the popular view that franchisees are much more successful than non-franchisees, SBA’s experience with defaulted loans does not support this.'

Although not looking into franchisee success rates as the other studies did, Prof. Scott Shane conducted research (1997) shone a light on the high mortality of franchisors, revealing that 1,292 franchise brands studied between 1979 and 1996, only 15% of the franchisors lived to be 17 years old, a rate comparable to independent start-up failures.

Although common sense would suggest that failure rate is lower for franchisees because of reduced risk due to the fact of using an established system; the franchise fees, royalty payments and other requirements of the franchise agreement may have vitiated this very advantage.

Sources

http://www.franchise-chat.com/resources/franchise_versus_company_operations.htm

http://www.tannedfeet.com/buying_franchises.htm

http://www.free-legal-document.com/advantage-disadvantage-of-a-franchise.html