Franchise

1. Franchise A franchise is a form of business ownership whereby a person or business buys a license to trade using another firm’s name, logo, brands and trademarks.

2. Franchisee • The individual or business who pays a license fee to the parent company for the purchase of a franchise. • Advantages • Relatively low risk with a tried and tested formula • Chance of business success is high • Lower start-up capital required for market research and development • Support from franchisor in terms of added-services such as staff training and financial management • Benefits from large-scale advertising help reduce costs • Disadvantages • Purchase of a franchise can be very expensive • No guarantee of a healthy return • Significant percentage of the profit is owed to the franchisor • Less flexibility and opportunity for innovation

3. Franchisor • A franchisee is the purchaser of a franchise. A franchisee pays a license fee to the parent company of the business (franchisor). In return, the franchisee pays a royalty payment. • e.g. McDonalds, Pizza Hut, Subway and The Body Shop • Advantages • The parent company can experience rapid growth without having to risk huge amounts of money as the franchisee pays for the outlet itself. • Franchising allows a business to have a national or international presence without the relatively higher costs of organic growth or mergers and acquisitions because the franchisee helps to finance the expansion. • Through expansion of operations, the franchisor can benefit from economies of scale. • The franchise can benefit from growth without having to worry about running costs such as staff wages, purchase of stocks and staff recruitment. • Franchisors receive a royalty payment from the franchisee, usually set as a percentage of any profits made by the franchisee. In addition they may also charge a membership fee to their franchisees. • Franchisees have more incentives to do well than salaried managers of a business, thereby increasing the chances of success for the franchisor. • Local franchisees will have greater awareness of local market conditions and cultural differences.

4. Franchisor • Disadvantages • It may prove difficult to control the activities of franchisees and to get them to meet the quality standards set by the business. • Franchisors take a huge risk when allowing other people or businesses to use their names. Franchisees that do not follow set procedures or do not meet expectations may end up harming the reputation of the whole company. • Although franchising is faster than organic growth, it is not as quick a method of growth as mergers or acquisitions.