Chapter 3- Franchise and co-operatives

Question 1

What is a franchise?

Answer 1

• It is where a business with a well known brand name (franchiser) lets a person (franchisee) or a group of people set up their own business using that brand.

Question 2

What is a franchise in exchange for?

Answer 2

• It is in exchange for an initial fee and continuing royal payments (certain percentage of turnover or profit) for as long as the franchise lasts

Question 3

How is the liability for the person using the franchise depended on?

Answer 3

• It depends on how the business is established
• A franchisee can choose which legal structure to adopt
• Franchisees have unlimited liability if they are in a business as a sole trader or partnership
• Franchisees have limited liability if they have set up the franchise as a company

Question 4

Examples of franchises in the fast food market?

Answer 4

McDonald’s and burger king

Question 5

Example of a franchise in the cosmetics market?

Answer 5

Body shop

Question 6

Advantages for the franchiser?

Answer 6

• Firm doesn’t have to spend large amounts of money (possibly getting into debt) in order to expand
• The products necessary for the franchise to operate are under the franchisers direct control
• Applicants are carefully selected for their suitability to become franchisees.
• Issuing franchises should therefore generate a continuous steam of revenue from franchisees who are determined to make their business succeed.

Question 7

Disadvantages for the franchiser?

Answer 7

• Control issues - The control the franchiser has over the product is not as great as it would be if the business sold the product itself so time is spent ensuring that franchisees are following procedures properly as bad publicity could affect the brand image
• Cost of supporting franchisees - ongoing support, training, market research and product development are available to a franchisee and there are considerable costs to be incurred
• Possibility of conflict- if there is a disagreement between franchiser and franchisee it may get quite acrimonious. If a product fails to sell a franchisee may blame the franchiser and may claim that inadequate marketing support or product training was given. This could lead to court action.

Question 8

What does whether a business feels that its worth franchising its brand depend on?

Answer 8

It’s managers attitudes to such factors:
- how much time and money they are prepared to invest in the business
- desired rewards
- attitudes to risk

Question 9

Why should a business not franchise it’s brand?

Answer 9

• Initial cost of setting up the whole network
• The risk that it may initially fail if the wrong locations/ franchisees are chosen

Question 10

Advantages for the franchisee?

Answer 10

• The franchisee is using a tried and tested brand name so there is a greater chance of success than if they had gone into the same sort of business with their own brand.
• specialist advice and training are available from the franchiser on an ongoing basis
• The franchiser carries out market research and provides marketing support. So franchisees can spend more time actually selling products and making a profit for themselves
• Easier to obtain a loan from the bank

Question 11

Disadvantages for the franchisee?

Answer 11

• Supplies have to be bought from the franchiser, which may charge higher prices than those for similar products on the open market (this will lower profit margins)
• There will be continuing royalty payments (a certain percentage of turnover or profit) to the franchiser
• Franchisee has less control over what it is selling, and how it sells it, than a person running their own business would usually have
• Business can’t be sold without the franchisers permission
• A franchise is for a fixed period of time and it isn’t automatically renewed

Question 12

What is a co-operative?

Answer 12

• A business that is owned and run by its members (employees and customers).
• Profits are shared between members rather than being distributed to shareholders

Question 13

What can co-operatives range from?

Answer 13

• retail business
• credit unions
• housing co-operatives

Question 13

Is a co-operative in itself a separate legal structure?

Answer 13

No

Question 13

What are the certain key elements to any co-operative business?

Answer 13

• It is owned by it’s members (the people who use it)
• Profits are shared among members
• It is run by it’s members who elect those managing the business so help shape the decisions their co-operative makes

Question 13

Advantages of a co-operative?

Answer 13

• Establishing one is legally straightforward; legal documentation is straightforward and inexpensive
• All involved are working towards a common goal; employees can be expected to be motivated so productive and customers are usually loyal and supportive
• Liability for members is usually limited
• High quality service should be provided, since customers are likely to be members and also profits made from customers are shared

Question 13

Disadvantages of a co-operative?

Answer 13

• Capital can be limited (banks may be reluctant to lend as a co-operative might be regarded as not a normal type of business)
• Weak management (those elected to manage may be ineffective meaning lower benefits for members and stakeholders
• Slower decision making since there is a greater involvement by members