Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Types of businesses: Franchise Businesses
- Sometimes a business be it a sole trader business, partnership or company
- Might opt to become/join a franchise business
- 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
- 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.
- 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
- 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
- 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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