Buying A Franchise

Question 1

What is a franchise?

Answer 1

A franchise is a joint venture between a franchisor and a franchisee. Whereby the franchisor sells the right to use its name and idea to a franchisee and the franchisee buys the rights to sell the goods or services under an existing business model and trademark.

Question 2

What are the 3 types of franchising?

Answer 2

1. Business format
2. Service franchise
3. Dealership or product distribution

Question 3

Explain a business format and give an example.

Answer 3

Business format is when a franchisee uses a franchisor’s trademark, and is able to access the whole system for running the business and promoting the goods and services.
An example of business format is Macdonalds.

Question 4

Explain service franchise and give an example.

Answer 4

Service franchise is a franchise that offers services. An example of a service franchise is an electrician.

Question 5

Explain a dealership or product distribution and give an example.

Answer 5

Dealership or product distribution is based on supplier-dealer’s agreement, whereby the products of a franchisor are distributed by the franchisee.
An example of this is a car dealership.

Question 6

What is licensing?

Answer 6

Licensing is a written contract in which the owner of the business(licensor) allows another business (licensee) to use, sell or make copies of the original product in a given territory.

Question 7

Name the three types of licensing.

Answer 7

1. Right to use trademark
2. Concession
3. Dealership

Question 8

Explain the right to use trademark.

Answer 8

The right to use trademark is when a licensor grants the licensee the right to exploit a trademark in return for a certain fee (royalties).

Question 9

Explain the two parts of concession

Answer 9

1. The licensor grants the licensee the right to sell its products in a given area.
2. The licensor grants the licensee the exclusive right to sell a range of particular products in an existing retail.

Question 10

Explain dealership (licensing)

Answer 10

In a dealership, the manufacturer grants the licensee the exclusive right to sell its products in a given area.

Question 11

1.Advantages of franchising in a franchisees viewpoint.

Answer 11

1. Proven system - meaning that when a franchisee franchises a successful franchise, the possibility of having profit is high due to the proven system of the franchise.

Question 12

2. Advantages of franchising in a franchisees viewpoint.

Answer 12

2. Setup assistance - meaning that the franchisee has the advantage of not starting a business from scratch and also can be assisted by the franchisor on how to run a successful franchise.

Question 13

3. Advantages of franchising in a franchisees viewpoint.

Answer 13

3. Advertising and purchasing - it becomes easier to purchase and advertise to customers due to the loyal customer base.

Question 14

Disadvantages of franchising in a franchisees viewpoint.

Answer 14

1. Rigid operation procedures
2. Increased setup costs
3. Bad decisions from the franchisor

Question 15

Advantages of franchising from a franchisor’s viewpoint.

Answer 15

1. Rapid expansion possible.
2. Dedicated owner-operators

Question 16

Disadvantages of franchising from a franchisor’s viewpoint.

Answer 16

1. Reduced income per unit
   2.High operating costs especially in head office structures
2. Restriction on freedom to act

Question 17

Explain the important concepts for franchising.

Answer 17

1. Franchisor - the owner of the company that is going to be franchised.
2. Franchisee - the company or the individual that is going to buy the franchise.
3. The franchise agreement - the written contract that explains the relationship between a franchisor and a franchisee and also explains the T&C’s of how the franchise will operate.
4. Royalty fee - is the monthly fee that is paid by the franchisee for the rights to operate the franchise.
5. Marketing fee - the money used to finance advertising.
6. Franchise fee - A lump sum of money paid by the franchisee after signing a contract. The franchisor uses this money to open a new business for the franchisee.

Question 18

Explain the termination of a franchise agreement.

Answer 18

Termination of a franchise agreement occurs when either the franchisee or the franchisor decides to end the business relationship.

Question 19

How can a termination of a franchise agreement occur?

Answer 19

1. Breach of contract
2. Bankruptcy
3. Failure to meet standard performace
4. Expiration of agreement terms