Chapter 3- Franchises and co-operatives

Question 1

Definition of franchise

Answer 1

• 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

• An initial fee and continuing royal payments

Question 3

What are royalty payments?

Answer 3

• A certain % of turnover or profit for as long as the franchise lasts

Question 4

What type of liability does the person or people have using the franchise?

Answer 4

• The type of liability using the franchise depends on how the business is established
• A franchisee can choose which legal structure to adopt but the franchiser may recommend a particular type

Question 5

What type of liability does a franchisee have if they are in a business as a sole trader or partnership?

Answer 5

Unlimited liability

Question 6

What type of liability does a franchisee have if they set up a franchise as a company?

Answer 6

Limited liability

Question 7

Examples of franchises

Answer 7

• McDonald’s
• Burger King
• Bodyshop

Question 8

Advantages for the franchiser

Answer 8

• The firm doesn’t (have to spend large amounts of money in order to expand (less possibility going into debt)
• Products necessary for the franchise to operate are under the franchisers direct control meaning franchisees are charged higher prices for supplies)

Question 9

Disadvantages for the franchiser

Answer 9

• 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.
• Cost of supporting franchisees (considerable costs to be incurred)
• Possibility of conflict: if there is a disagreement between franchiser and franchisee it may get quite bitter. If a product fails to sell, a franchisee may blame the franchiser and may claim that inadequate marketing support or product training was given

Question 10

Factors that determine whether a business should franchise its brand?

Answer 10

• Initial cost of setting up the whole network (there is a risk that it could fail if wrong locations/franchisees are chosen)
• Long-term view may need to be taken (unlikely to see benefits straight away)
• Loss control issue
• Depends on how much time and money they are prepared to invest in the business

Question 11

Advantages for the franchisee

Answer 11

• They are using a tried and tested brand name so there’s a greater chance of success
• Specialist advice and training are available from the franchiser to the franchisee
  -Franchisee can spend more time selling the products and making profit due to the franchiser carrying out market research and support.
• Easier to obtain a loan from the bank due to these factors

Question 12

Disadvantages for the franchisee

Answer 12

• 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) for the franchisee
• Continuing royalty payments to the franchiser
• Franchisee has less control over what its selling/ how it sells over the person running the business

Question 13

Definition of co-operative

Answer 13

• A business that is owned and run by its members (employees/customers)

Question 14

What happens to profit in a co-operative?

Answer 14

• It’s shared between members rather than being distributed to shareholders

Question 15

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

Answer 15

• Owned by it’s members
• Ran by its members who elect those managing the business
• Profits are shared among members

Question 16

Advantages of co-operative

Answer 16

• Liability for members is usually limited
• Establishing a co-operative is legally straightforward and inexpensive
• All involved are working towards a common goal, so employees are expected to be motivated and therefore productive

Question 17

Disadvantages of a co-operative

Answer 17

• Capital can be limited: It’s limited to what is contributed by members so banks may be reluctant to lend to it
• Slower decision making since there is greater involvement by members
• Weak management: those elected to manage may be well intentioned but ineffective due to not having sufficient grasp of business principles. This leads to lower benefits for members and other stakeholders.