Business Ownership - Franchising 1.5.4

Franchise - is when one business, the franchisor, gives another business, the franchisee, permission to trade using the franchisors name and selling the franchisors goods. Can be seen as less risky option for business start-ups, but can mean additional costs and loss of independence.

Franchisee - is a business that is given permission from another business to trade using its name or goods/services in return for a fee and share of the profits. They will also be given support by the franchisor but will have less autonomy in decision making.

Franchisor -  is a business that sells a license giving permission to another business to trade using its name and goods/services. This allows the franchisor to grow more rapidly but may damage its reputation if standards are not maintained.

Franchising is a two way relationship;

1. The FRANCHISEE pays an initial fee to the franchisor
2. The FRANCHISEE pays an annual fee to the franchisor
3. The FRANCHISEE often has to buy supplies from the franchisor
4. The FRANCHISEE pays for a proven "business format"
5. The FRANCHISEE can use a well recognised brand and name
6. The FRANCHISOR must support the franchisee in a range of areas e.g. advertising, training, recruitment and a range of services.

 ADVANTAGES OF BEING A FRANCHISOR 

• Rapid expansion (Optimum size and maximum profitability)
• Cheap investment 
• Motivation - franchisee has own capital tied up in the business so highly motivated to succeed
• Economies of scale
• Mass advertising
• Franchisee pays percentage of profits to the franchisor

DISADVANTAGES OF BEING A FRANCHISOR

• Loss of control -  over brand image
• Managing growth (enough staff? enough resources?)
• Litigation - a failed franchisee is a court case waiting to happen.

 
ADVANTAGES OF BEING A FRANCHISEE

• Lower risk method of market entry = lower failure rate
• Still your own business
• Tested and developed format and brand
• Advice, support and training
• Easier to raise finance
• No industry expertise is required
• Buying power of franchisor#

DISADVANTAGES OF BEING A FRANCHISEE

• Not cheap! Initial fees + royalties and commission  
• Restrictions on actions, including selling, lack of control
• Problems selling business on
• What happens if the franchisor fails?