Franchising and the Small Business
12 important questions on Franchising and the Small Business
Three typologies of SE reliance upon LE
- Marketeers: firms that actually compete in same market as LE (ex. computers/restaurants)
- Specialists: firms that carry out functions that LE do not find economic to perform (ex. specialized retail/repair/maintenance)
- Satellites: SE is highle dependent on LE for majority on his trade
Advantages of franchising to the franchisor
- Increase number of distributive outlets with little investment
- Franchisee are highly motivated to maximize growth & profit
- Franchisee is locally owned, so accepted in community
- Franchisee is self-employed, so responsible for own payroll, rente etc.
Disadvantages of franchising to the franchisor
- difficult to control, can lead to bad reputation
- not always certain about declared level of business activity
- when outlet seems demotivated, there's not much you can do as long as they handle in terms of contract
- problems with information feedback
- franchisor faced with paradox: there is a need for standardized pproduct, but an uniform presentation clashes with focus on personal attention of franchisee
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Advantages of franchising to the franchisee
- running own business, and benefit from economies of scale and marketing
- LE does advertising, so franchisee can focus on other aspects
- less capital needed for setting up, franchisor can help with bank loan etc.
- other franchisees in network can have same problems, so are source of non-threatening advice
Disadvantages of franchising to the franchisee
- tight control of franchisor, leaves little space to impose own personality in business
- When of franchisor is tarnished, franshisee may suffer due for being representative
- services provided by franchisor may be a heavy expense
- agreement may not fulfil franchisee expectations
Advantages of franchising to consumers & local economy
- many franchisees operate on long hours of service
- franchisees should be able to offer highly personal service
- consumers can locate all outlets under single name
- in case of franchisee failure, they can contact franchisor
Disadvantages of franchising to consumers & local economy
- reduce level of diversity in local economy
- may 'export' money out local economy by payments to franchisor
- may 'import goods & services from franchisor rather then from small local suppliers
Advantages of franchising to national economy
- franchising offers opportunities for individuals who seek self-employment, but miss experience and knowhow
- franchising can offer possibilities of growth levels
Three facts about franchising in US
- account for 35% of all retail sales in US
- account for 10% of GDP in US
- expanded by around 500% between 75-90
3 factors that stimulated growth of franchise
- growth of economy since WOII
- downsizing policies exercised by LE
- corporate executive with necessary financial resources, seeking for self-employment
3 key documents prior to beginning of franchising
- operating manual with instructions for guidance of franchisees
- franchise contract, with legal obligations for both parties
- franchisor prospects as a marketing tool for use in recruiting franchisees
6 main components of franchise contract
- guarantees granted to franchisees of teritorial exclusively
- franchisor's rights to their operating manuals
- post termination restrictions in competition
- franchisor's stakes in franchisee's businesses in owenership of site, equipment etc.
- franchisor's rights to police quality of franchisee's output
- franchisor's imposition of output targets
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