Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Types of businesses: Franchise Businesses

Characteristics/Features

  • A franchise is when the owner of a business or business idea/formula (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea – often in a specific geographical area.
  • The franchisee sells the franchisor’s product or services, trades under the franchisor’s trademark or trade name and benefits from the franchisor’s help and support
  • In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue
  • The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used
  • Examples of franchises are Chicken Inn, Spar, Pizza Inn, Chicken Slice etc.
  • International examples include Wimpy, McDonald, Starbucks etc

Advantages

To Franchisee

  • The franchisee’s business is most likely to be more successful because their business would now be based on a proven and successful idea
  • The franchisee gets to use a well-recognized brand name and trademarks also increasing their chance of success and minimizing the time needed to build up goodwill
  • The franchisee receives support from the franchisor which may include training, setting up shop and other necessary ongoing advice
  • The franchisee benefits from centralized advertising and marketing efforts by the franchisor
  • Relationship with suppliers may already be established
  • Economies of scale, for example, the whole franchise may buy purchases as a group and enjoy trade discounts.

To Franchisor

  • Is a quick risk free method of expanding the business without spending the franchisor’s capital
  • Economies of scale, for example, the whole franchise may buy purchases as a group and enjoy trade discounts
  • Franchisees pay the franchisor money providing an alternative source of income

Disadvantages

To Franchisee

  • The agreement comes with restrictions which might prevent the franchisee in operating the business as he sees fit. (There is lack of autonomy.)
  • Restricted area in which they can operate. If they want to expand to another geographical area they may have to pay additional fees to the franchisor
  • Have to pay a percentage of their sales as a fee in addition to the initial payment to the franchisor
  • This increases the operating costs of the franchise. Royalties and advertising fees may also have to be paid
  • It may be difficult to sale the franchise due to licencing restrictions.
    Other franchisees may tarnish the image of the whole franchise business

To Franchisor

  • Massive capital outlays are required to build up the franchise.
    Other franchisees may tarnish the image of the whole business
  • The franchisee may have to disclose protected information to the franchisee for example formulas etc. which comes with the risk that the franchisee might disclose these.

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