Franchising is a type of business relationship between franchisor and franchisee. Where franchisor is the issuer of the license, privileges, and rights to the franchisee to do a business on behalf of the brand name, and the franchisor provides business assistance, management, training, marketing, organizing, and merchandising in return. The franchisee has to pay either a one-time payment or a percentage of the income on annual basis.
In other words, we can also say that franchising is the right of doing business and selling products and services under the umbrella of your brand. Those rights, privileges, and licenses are the intellectual property rights that the franchisor holds.
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SWOT Analysis of Franchising Business
In the swot analysis of the franchising business, we’ll study internal and external factors that are stronger and weaker. How you can capitalize on the opportunities and avoid threats by focusing on the strengths of the franchising business.
Here’s the swot analysis of franchising business model;
Strengths
Recognized Brand
The recognized brand name is a valuable asset to any business and company. It sells the majority of its products and services based on its brand name. The franchisor also follows the concept of utilizing their brand name and expanding its business. The franchisee is a new person in the market and associating himself with the big brand would push him to a great extent.
Easy Financial Support
When you’re operating under the umbrella of the big recognized brand, then you don’t worry about expansion capital. If you maintain your end of the deal well, the franchisor would open its line of credit for you to expand your business. When you do that, it would be beneficial for both of you. That’s why franchisors usually provide financial supports to their franchisees.
On the other hand, financial institutions like banks and credit card companies give financial support to the franchising business easily. It’s because the success rate of franchising businesses is very high, and the risk of failure is very low.
Built Customer Portfolio
The most important thing about a franchising business is the built-in customer portfolio and database. You don’t have to worry about finding and targeting your customers. The franchisors usually have done a lot of advertising and marketing of their products and services. The franchisor’s experience in the industry has created a lot of loyal customers’ database overtime.
When you associate yourself with a recognized brand, then a plethora of loyal customers would come to you automatically because of the brand affiliation.
Easier to Setup
Whenever you start a business, unexpected things happen and they require you to come up with something new. It doesn’t matter whether it’s a coffee shop business, tech company, software house, or manufacturing factory, problems bound to happen.
But the good thing about the franchising business is that the parent brand provides you the entire initial business layout. How you should take steps when things happen. That’s how you reduce the initial expenses without doing any experiments. You don’t waste your time on extraneous details. The parent brand would give you everything preplanned.
Few Chances of Failure
When you have got everything in order, and you know what to do when anything happens. Whether it’s a business model, marketing campaign, supply of products and services, or customer database, you’ll get everything readymade. All of these factors increase the chances of success of your business.
The other reason for the success of franchising business is expansion and teamwork. The decentralized system helps the franchisor to expand and distribute responsibilities among franchisees. When more people work together toward a collective goal, it increases the success rate.
Weaknesses
High Initial & Ongoing Cost
When you would like to join and purchase a big franchise, then you have to make a heavy upfront payment to get the license and rights to do the business. The purpose of setting heavy initial costs is to get the idea that how invested franchisees are in the brand’s business and goals.
Along with the high initial cost, there’s also an ongoing cost that you have to incur annually. It includes many things like the advertising and marketing cost that the parent brand does, a pre-decided commission rate on the profit, rent, and insurance, and many other variable costs varying from business to business.
Strict Regulations
The rules and regulations that franchisors provide to the franchisee are very strict. They involve a span of control that the franchisor has over the entire business. You can’t launch something new or update any of the existing products/services. You have to do the business the way the franchisor tells you to do. If you do anything out of the pre-decided rules and regulations, the franchisor would hold you in violation of the contract. It would result in the form of a lawsuit.
Reliance
One of the most important things is that you can’t run the franchising business independently by your own rules and wishes. You have to stay within the domain of the parent franchise. Some franchise brands give a little control and independence to the franchisees, but it varies from brand to brand.
Opportunities
Exploit Market Opportunities
If you’re in a controlled economy, where there’s no such thing as a free-market. Factors like the government regulations are high, unpredictable circumstances, changing market trends, and you aren’t familiar with the socio-cultural setup of the country. In such an environment, affiliating your business and buying any big franchise relevant to your field would be the most suitable choice. That’s how you can exploit the marketing opportunity.
Be Your Boss
If you’re an entrepreneur and you want to be your boss, then franchising would help you to achieve your goal. Franchisors usually give enough control and independence over a daily routine business that you can hire other people to do the job according to the regulations of the parent franchise. While people are working for you under the regulations of the franchise, and you just have to manage everything. That’s how you can maintain your independence and authority in your franchising business.
Threats
Newer Business Models
If you have some other business model in mind that you want to adapt and apply in your franchise location. You can’t apply it; the contract won’t allow you to do it. If you do it, then it would violate your intellectual property right.
Declining Position of Brand in the Market
If the marketing position of the franchise brand is falling, and people aren’t buying the brand’s products and services. You can’t update or modify the product/service. You also can’t use a different marketing strategy to change the position of the brand in the market.
Competitor Franchises
If there’s a new entrance of franchise competitors in the market in the same field, it would decrease the sale of the company. McDonald’s and Starbucks are a very good example of competitor franchises in the same field. When they both are present in the market, they split the total market share. Nowadays, there are many franchises, which means less profit for everyone.
The Consistent Growth of Competitors
If customers are satisfied with the existing brand and its growth rate is consistent. It would be difficult for you to make the name of your franchise brand in the presence of an existing brand. Realistically speaking, there are many franchises in every field.
Conclusion
After an in-depth study of swot analysis of franchising business, we have realized that franchising is a safe and secure investment with less autonomy. If you love following the rules and regulations and the market position is uncertain, then buying a successful franchise and associating your business with it would increase the option of success.
