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Analyze the limitations associated with a franchise arrangement

      

Analyze the limitations associated with a franchise arrangement

  

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Martin
Disadvantages of franchising.

Higher legal expenses

The necessity of preparing agreements, and related documents, and filing them in various states (with attached audited financials) represents a significant expense, although the year-to-year expenses are generally less than those initially incurred in setting up the structure and related documents. Additional legal (and possibly accounting) costs will be incurred if a separate legal entity is used for the franchising program.

Regulation of the relationship

Franchise laws are particularly technical in their application (for example, if a Franchiser provides only 9 days of pre-sale disclosure rather than the required 10, the Franchisee has an automatic rescission right, even though the missing day was not the cause of any loss.

Technical constraints

Franchise laws in a number of states regulate the circumstances in which a Franchiser may terminate or refuse to renew a franchise. While generally not preventing Franchisers from achieving termination or non-renewal, these laws do present a number of technical requirements that must be complied with.

Franchising marketing constraints

Advertisements, brochures, flip charts, video tapes, etc. offering the franchise (but not retail advertisements) must be pre-cleared with state agencies and cannot contain earnings claims.

Control issues

As with dealerships, there may be quality control and related issues, at least as compared to company-owned operations.

Business relationship issues

Perhaps more than with dealers, Franchisees typically view themselves as, to some degree, partners with the Franchiser in the development and possible success of the system. While most will agree that committee management doesn't work and that there needs to be ?one captain for the ship a wise Franchiser will work with his Franchisees, probably with the help of a franchise advisory council, in charting strategic directions, implementing marketing plans, etc. A Franchiser must be psychologically comfortable working with Franchisees who will understandably take the view that ?if we‘re going to be in on the landing, we‘d like to be in on the takeoff too.

Potential loss of freedom

Unless carefully designed, awards of ?exclusive territories may generate legal and other problems when a Franchiser seeks to expand through alternative channels of distribution (Internet, mail order, etc.), co-branding opportunities, mergers with existing competitive chains, etc. Appropriate franchise agreement provisions, and prop education of Franchisees, and management of their expectations, can largely avoid these issues.
marto answered the question on January 30, 2019 at 10:52


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