Franchises
From WikiTextbook
Even though it usually appears under ownership, franchising is not a form of ownership, but a form of organisation. A franchise may be owned as a sole trader, partnership, co-operative or private or public limited company. It is, however, a very popular way for people to get into business.
A franchiser will sell a franchisee the right to sell its goods or services. The sale usually involves a fixed fee (which can be very high) and a percentage payment of the franchisee’s sales turnover (called a royalty). McDonalds is an example of a franchiser as they let other people (franchisees) open McDonalds restaurants in return for a fee and a percentage of the money made from sales. (MacDonald’s also operate a number of burger bars themselves). Other examples of franchises are Snappy Snaps, Kall Kwick, Benetton and the Body Shop.
The above examples are all business format franchises. A franchise can also mean the right to sell or do something in a particular territory or context; being granted a sales territory is sometimes also called a franchise.
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Advantages of Becoming a Franchisee
Only 6% of new franchises go bankrupt in their first year of operation compared with 50% of normal business start-ups. Franchises have a better chance of survival because they have an established name and have proven to be successful elsewhere. McDonalds restaurants are very successful all over the world and whenever a new one opens it is usually very busy.
The franchiser will give the franchisee training. This will mean that the new manager will have the skills to operate the franchise and increase its chance of being successful. McDonalds train new franchisees before they open their restaurant.
The franchiser provides the equipment and stock required. McDonalds franchisees are all very similar as they have the same equipment and they sell the same products.
The franchiser will promote the company by running advertising campaigns which will help the franchisees make a success of their business. McDonalds spend large sums of money advertising their restaurants and products on the television, radio and billboards.
The franchisee will be given an exclusive area to sell in. McDonalds are careful not to locate burger bars too close to each other because then they would be taking business from one another effectively competing with each other.
Disadvantages of becoming a franchisee
The franchisee has to pay the franchiser for the right to use their name. This can be a fixed amount at the start and/or a percentage of the sales, but it is likely to be both. With McDonalds at least 21.5% of all your sales and profit go to the company. That’s 12% for rent of the restaurant and brand name, 5% for use of the McDonalds system (consultants, workers inside the corporation) and 4.5 % for the national marketing spend. These are all payable every month. Some franchisers are so popular that there is a great deal of competition for franchises. The Body Shop, for example, receives 200 times the applicants it needs, in spite of the high cost of buying a franchise.
The franchisee has to operate the business in the way the franchiser wants. A McDonalds franchisee would not be allowed to start selling McScotch Eggs if they wanted to as it is not an approved McDonald's product.
Advantages for the Franchiser
There is very little risk involved as the franchisee has to put up the money to start the franchise. This allows the business to expand rapidly both nationally and internationally. McDonalds has thousands of restaurants all over the world.
The franchisee will be very motivated to make a success of the franchise as they have a financial interest in it. If the franchisee is successful the franchiser will make more money.
Disadvantages for the franchiser
If the franchise is run badly it will damage the franchiser's name. This may harm the sales of other franchises and reduce the amount of money the franchiser will make.
If they operated the franchise themselves they may make more money as they would receive all of the profits rather than just a percentage. It is very possible that the franchiser would not have the funds available to open as many stores if it did not use franchisees.
