When a company starts out as a franchisor, the main dilemma it faces is that whether it will have some company-owned outlets or should the whole chain will be of franchised units. Both the options have their advantages and disadvantages and here is a short summary of them.
The advantages of company-owned outlets over franchised units
Since the company-owned outlets are in the direct control of the franchisor, they follow the company’s business model better than the franchised units. The owners of the franchised units have some independence and may deviate from the model from time to time. They can also be reluctant to introduce a new product or service, which can easily be started in a company-owned outlet. If the manager or the supervisor is not running the show properly, he can easily be dismissed by the franchisor. If the same things happen with the franchise units, he cannot be removed so easily! Technically, a franchisor can terminate the franchise agreement, if the latter breaks any rules and regulation of the agreement. But it also puts a pressure on the franchisor, as each termination will have to be put in the UFOC for future franchisees to see. The customers also tend to patronize the company-owned stores over franchised units, if they come to know about their status (outwardly, all units of a franchise chain look the same, whether they are franchised or company-owned.)
The advantages of franchised units over company-owned outlets
It is a known fact that franchised units are more profitable than company-owned outlets. The reason behind it is that the former is run by the owner who has direct stake in the success of the unit unlike the latter where a manager oversees the running of the business. No matter how efficient and dedicated the manager or supervisor is, at the end of the day, he is a mere employee. Moreover, by going for the franchised units instead of company-owned outlets, a franchisor can devote more time in perfecting the system, instead of handling the pressure of starting a new outlet from its pocket. It is also free to divert the money required to start a company-owned unit for the betterment of its products/services. The franchisor can, thus, open more units within a given time period, as its attention is not fixed in developing one unit. Also, if the franchisor is new to the place, its franchisees will have better knowledge of the market and local condition than it. That will help the franchisor to penetrate the market faster.
The ideal scenario
The ideal scenario in such case is to go for 2 to 5 company-owned units along with franchised units. These company-owned units can be used for various purposes; it can be used to show the business and also to provide on-site training to the people starting a franchise with the company. It can also act as a lab for new product-launch, before introducing it to the whole chain. Lastly, if a franchisor cannot run the company-owned units for some reasons, it can always offer them as franchise businesses for sale.
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