Franchise

Franchise is a the act of using another firm's successful business model. For a franchise, the franchise is an alternative to owning "chain stores".

Advantages

- It is still your own business – even if you are sharing the profits with the franchisor.

- The investment should be in a tried and tested format and brand.

- The franchisee gets advice, support and training.  The franchisor will also supply key equipment, such as IT systems, which are designed to support the operation of the business.

- It is easier to raise finance - the high street banks have significant experience of providing finance to franchises.

- No industry expertise is required in most cases.

- The franchisee benefits from the buying power of the franchisor.

- It is easier to build a customer base – the franchise brand name will already by established and many potential customers should already be aware of it.

Disadvantages

- Franchises are not cheap!  The franchisee has to pay substantial initial fees and ongoing royalties and commission.  He/she may also have to buy goods directly from the franchisor at a mark-up.

- There are restrictions on marketing activities (e.g. not being allowed to undercut nearby franchises) and on selling the business.

- There is always a risk that the franchisor will go out of business.

- The franchise needs to earn enough profit to satisfy both the franchisee and franchisor - there may not be enough to go round!

http://www.tutor2u.net/blog/index.php/business-studies/comments/qa-what-are-the-advantages-to-a-start-up-of-being-a-franchise

Conclusion

Small business's may franchise as they will use a business idea that has been succesfull in the past, so they think they are going to make money.

Although it costs a lot to start a franchise, the benefits usually outweigh the risks. If a franchise goes wrong, it will reflect badly on the supplier, and they may not get another chance of franchising.