Understanding Franchise Business Models

This assignment delves into the intricacies of franchising as a business model. It requires an analysis of various perspectives on franchising, including its legal framework, the role of entrepreneurship within it, and key factors contributing to successful franchise ventures. Students are expected to synthesize information from provided resources to develop a comprehensive understanding of this popular business format.

Franchising
716FRAN
AQF Level 9
ASB
The Raw Kitchen Fremantle
Word count:3000
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Executive Summary
This Report explores the concept of becoming a franchisee as compared to becoming an
individual business owner or entrepreneur. It begins by introducing the franchising topic
through a historical background and defining major terminologies. The report then proceeds
to explore the potential benefits and shortcomings of becoming a franchisee as compared to
being a business owner to establish which option would b better between retaining an
individual business and purchasing a franchise. The report then explores the experience as a
franchisee as compared to being an entrepreneur, my attributes including characteristics,
abilities, resources, and preferences, Identifies the major issue that could arise when buying a
franchise and gives an analysis of financial and legal risks as well as obligations. The report
concludes with an overview of the expected future developments in the industry and their
impact on me
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Contents
Executive Summary..................................................................................................................2
1. INTRODUCTION................................................................................................................. 4
THE ADVANTAGES AND DISADVANTAGES AS A FRANCHISEE COMPARED TO
AN INDEPENDENT BUSINESS OWNER............................................................................5
Advantages...............................................................................................................................5
Disadvantages.......................................................................................................................7
WHAT IT MIGHT BE LIKE BEING A FRANCHISEE INSTEAD OF AN INDEPENDENT
ENTREPRENEUR...................................................................................................................8
PERSONAL CHARACTERISTICS, ABILITIES, RESOURCES AND PREFERENCES.....9
WHAT COULD GO WRONG WHEN BUYING A FRANCHISE.......................................11
LEGAL AND FINANCIAL CHALLENGES AND OBLIGATIONS...................................12
Legal challenges................................................................................................................. 13
Financial challenges........................................................................................................... 13
Obligations of the franchisee..............................................................................................14
Obligations of the franchisor.............................................................................................. 14
IMPACT OF FUTURE DEVELOPMENTS IN THE INDUSTRY OR BUSINESS ON ME15
CONCLUSION...................................................................................................................... 16
Reference list...................................................................................................................... 18
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1. INTRODUCTION
There are many forms of business options available to business people. A person may choose
an option based on its relative advantages and disadvantages over other existing forms of
business. Examples of forms of business are being an independent Entrepreneur and
Franchising. Franchising is one of the majorly used forms of business which dates back to the
19th Century in America. The form of business was formed basically to help American
business owners establish an efficient distribution channel (Webber,2013). The concept has
since spread to other parts of the world. Among the World’s top franchises McDonald’s, 7-
Eleven Inc., The UPS Store, Dunkin’ Donuts and Dairy Queen among others. Franchising
involves a Franchise, Franchisor and a franchisee. Franchising is a continuous relationship
between a franchisor and a franchisee in which the franchisor provides the franchisee
licensed privileges to do business and offers training, assistance and products in exchange for
money. It, therefore, involves the willingness of the franchisor to grant rights of usage of his
brand to the franchisee. The agreement by both parties to enter into an agreement that is
mutually beneficial and legally binding and the willingness of the franchisee to pay fees and
other considerations for the privileges obtained through the agreement (S,2009). On the
hand, entrepreneurship is the ability and willingness to start and manage a business venture
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along with any risks that might come with it to obtain profit. This report seeks to analyse the
advantages and disadvantages of being a franchisee, differences between a franchisee and an
independent entrepreneur, personal attributes, things that might go wrong when buying a
franchise, legal, financial challenges and obligations and anticipated future developments in
the industry.
THE ADVANTAGES AND DISADVANTAGES AS A FRANCHISEE COMPARED
TO AN INDEPENDENT BUSINESS OWNER
It is expected that there will be many advantages and disadvantages of selling my Business
The Raw Kitchen Freemantle and Becoming a franchisee
Advantages
Reduced Risk of Business failure
The risk is a concept a business owner is wary of especially when starting up new ventures.
Business risks can significantly affect the operations of the business. One of the main
advantages of joining a franchise is the fact that there are minimal risks involved (Webber,
2013). Unlike a business owner who operates with much uncertainty working under a
franchise presents an opportunity for the franchisee to work with a brand that has already
been established, already tested over duration of time and whose commercial value is already
known. This means that there is increased security (Alon, 2008).
Ease of financing
Working under an established brand also allows the franchisee to access credit facilities from
big corporations when a need arises. While establishing an independent might lead to
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publicity related issues for a business owner, working under a franchise makes it possible for
the franchisee to enjoy the fruits of an already established brand which leads to saving of
money and resources that would have been used in building a new brand (Adams, Hickey &
Jones,2006).
Ongoing Support
Apart from granting the franchisee an opportunity to work with them, the franchisor is also
tasked with the responsibility of availing training programs and first-hand support. It is also
the franchisor's role to help a franchisee to attract and retain customers. A franchisor may
also help a franchisee in control systems for increased efficiency in operations. Unlike being
a business owner, a franchisee can also be helped with initial starting capital marketing and
advertisements as well as equipment such as machines and vehicles. Although the kind of
support provided may vary, the basic principle is that unlike individual business owners,
franchisees do not have the option of suffering alone (Clifton, 2008).
Defined territory
This is viewed as the main attraction to franchising. The location for starting a franchise
outlet is carefully chosen, to increase revenue and prevent trading on each other’s toes. This
is unlike normal business which lacks defined territories hence increased chances of
unhealthy competition. The ease of acquiring trading premises in places such as shopping
canters with high populations is also high unlike for an individual business owner (Spencer,
2010).
Established Operating Model
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Franchises already have established operating models in place, unlike business owners who
are required to create their operating models. Working under an established model enables a
franchisee to hit the ground running immediately unlike for an individual business owner
(Webber, 2013).
No need of prior experience
Unlike for a start up businesses, there is no prior business experience required to run a
franchise. This is well taken care of by the franchisor through training and support on how to
use their business model
Disadvantages
Lack of autonomy
Unlike being a business owner, working as a franchisee presents the challenge of working
without the discretion of making own decisions on how to run your business. Each franchise
has its model of operation on which training is provided by the franchisor. This, therefore,
means that each franchisee is required to operate as per the policy set by the franchisor which
hampers their creativity. There are also penalties for deviating from the policies set by the
franchisor (Sugars, 2007).
Initial and continuing fees
Joining a franchise also requires a franchisee to part with lump sum amounts of money
charged for using an already established brand name. The amount charged can vary from
franchisor to another. A franchisee is also required to pay royalty fees from their profits and
in events where there is a tight profit margin, the fee is charged from their turnover. This is
unlike owning a business where you are not required to pay such fees (Webber,2013).
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Requires franchisee to be on their toes
Although there is some degree of support from the franchisor, so much hard work is required
from the franchisee to run a successful franchise. A franchisee might be required to work
approximately 6o hrs a week to get their business off the ground. Running a franchise,
therefore, requires so much dedication and requires the franchisee to be always on their toes
(SPinelli, Rosenberg & Birley, 2014).
Franchisor’s decision could lead to failure of business
While a business owner runs their business using their own decision, a franchisee is required
to work under the decisions made by the franchisor. This, therefore, means that even if a
franchisee runs a successful outlet, it might end up collapsing as a result of poor decisions
made by the franchisor because the franchisee lacks control over the decisions running their
franchise outlet (Webber, 2013).
WHAT IT MIGHT BE LIKE BEING A FRANCHISEE INSTEAD OF AN
INDEPENDENT ENTREPRENEUR
Numerous differences exist between franchisees and independent entrepreneurs. The major
differences exist in how the two work as well as the level of control over the ventures that
they run.
Limited Creativity License
Working as a franchise requires one to operate in an environment with limited creativity.
Being a franchisee therefore unlike being an independent entrepreneur means that one is
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limited in the creative decisions they can make. While an Entrepreneur can make as many
creative decisions as possible, a franchisee is required to work with the decision made by the
franchisor (Webber,2013).
Incurring more expenses
Working as a franchisee means more costs as compared to working as an entrepreneur. While
both require an initial capital; a franchisee is required to pay a buy-in fee on top of that for
them to be allowed to use the franchisor’s brand and product. Working as franchisee also
requires payment of franchise fee for each period agreed upon. So unlike an entrepreneur
who enjoys all the profit alone, a franchisee is expected to offer a chunk of their profits to the
Franchisor. This means that the franchisee is beholden to the franchisor in as long as the
enterprise is running, unlike an entrepreneur who is beholden to nobody (Verbieren, Cools
and Abbeele 2008)
Nurturing and support
Unlike entrepreneurs who are known to be fighters, working as a franchisee means that you
will require constant and support and training from the Franchisor to successfully run a
franchise outlet. On the other hand, Entrepreneurs work on their own without requiring any
nurturing or constant support from anyone (Abell, 2013).
Working under supervision
Working as a franchisee means that you will be under constant supervision of the Franchisor
to ensure that there is adherence to the Franchise model. A franchisee is not for example
allowed to add any new products or rebrand the products (Webber, 2013). On the other hand,
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an entrepreneur establishes and follows their own rules and is required to be answerable to
anybody.
PERSONAL CHARACTERISTICS, ABILITIES, RESOURCES AND
PREFERENCES
Personal characteristics
Commitment
Goal orientation
Passion
Creativity
Superb Business skills
Decisiveness
Vision
Risk-taking
Good listening skills
Persuasiveness
Integrity
Abilities
Ability to lead by example
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Ability to sacrifice time for others
Ability to work for long hours
Ability to work under pressure
Ability to outperform challenges
Ability to Innovate
Personal resources
Time
I have unlimited time enough to actualize any venture that I would want to pursue
Money
I also have sufficient finances
Attention
I can focus and pay attention to details
Energy
I have enough energy to start and effectively manage an enterprise
Preferences
Autonomy
I prefer working with the ability to make own decisions and with minimal supervision.
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Unrestricted creativity
I prefer working in an environment with no restriction to creativity
Freedom
I prefer having the freedom to choose a working schedule that I am comfortable with, the
location that I want and freedom to decide what I think is best for my business.
WHAT COULD GO WRONG WHEN BUYING A FRANCHISE
Buying a franchise has both its advantages and disadvantages. Many things can go wrong
when buying a franchise.
Failure to closely review the franchise agreement
A franchise agreement is a legal document governing the relationship between the franchisee
and the franchisor and specifying the terms of purchase of a franchise. This makes it the most
important document in this association. Sometimes franchisee may hurriedly make a final
decision agreeing to the terms of the agreement without closely monitoring it (Webber,
2013).
Failure to review the Disclosure Document
Before buying a franchise, the franchisee is required to have as much information as possible
about the franchisor for informed decision making. The disclosure Document presents an
opportunity for the franchisee to review information about the franchisor concerning the
agreements that the franchisee is required to sign, financial status of the franchisor and the
franchise system (Davies, el al,2011) The Disclosure document also contains information
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about franchise’s staff, territory rights, required investment and purchases, responsibilities of
a franchisor and the franchisee, initial and continuous fee required to run the franchise and
Franchisors litigation and bankruptcy history successfully. Failure to review and understand
this document well or disclosure of the wrong information might lead to future challenges for
the franchisee (Larty, 2010.)
LEGAL AND FINANCIAL CHALLENGES AND OBLIGATIONS
Legal challenges
Legal and financial matters are the most common reasons that may cause causes of failure of
franchises.
Franchise agreement
A franchise agreement is the cornerstone of any successful franchise. It specifies the terms
and relationships between the franchisor and the franchisee. Among the information included
in a Franchise agreement is information about training, assistance and advertisements,
termination or transfer of the franchise, duration of the franchise, territory, franchise system,
rights and obligations of the franchisor and franchisee and payments made by the franchisee
to the franchisor. The Agreement is legally building to both parties and therefore they must
honor it(Webber,2013).
Financial challenges
Contributing to the marketing fund
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It is a requirement that the franchisor contributes to the marketing fund established by the
franchisor to facilitate the creation of successful marketing strategy. These contributions are
determined as a percentage of the gross sales and paid on an ongoing basis for the entire
period of the franchise term. This can be a challenge in a situation where the franchisee
makes loses and is the sum is deducted from their turnover (Kalnins, 2010)
Initial capital
It can be quite expensive to buy a franchise because of the initial capital involved.
Sometimes, a franchisor may request a franchisee to commit over half of their total
investment which might be quite challenging for an individual franchisee. They may also be
required to spend money in buying their equipment and stock (Webber,2013).
Obligations of the franchisee
Compliance with the franchise model
By buying a franchise, the franchisee is expected to uphold and carry on with the model
established by the franchisor. This requires the franchisee to comply with franchise’s systems
and procedures.
Purchase and supply Franchise’s products and services
The franchisee has the responsibility of supplying products and services to customers in their
territory. Sometimes they may also be required to maintain minimum stock levels or purchase
products to be sold from the franchisor (Lewis, 2009.)
Minimum performance criteria
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Sometimes the franchisee may also be required to satisfy certain minimum performance
criteria in the franchise agreement. It is, therefore, an ongoing obligation on the side of the
franchisee to ensure that their performance is as per the agreement
Obligations of the franchisor
Commercial and technical assistance
The franchisor has the obligation of providing commercial and technical assistance to the
franchisee such as training and information sharing to facilitate effective operation of the
franchise outlet.
Loyalty
The franchisor has the obligation of respecting the agreement between them and the
franchisee and treating all franchisee equally.
Obligation to consult
The franchisor has an obligation of consulting franchisees’ opinions and advice on areas
requiring expert advice as well as working closely with them.
IMPACT OF FUTURE DEVELOPMENTS IN THE INDUSTRY OR BUSINESS ON
ME
Just like any other industry, the franchise is expected to have various changes as we enter into
the future. For these changes, there will be an impact
Technological advancement
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Technological incorporation into franchising is one of the anticipated future changes
especially with the modern use of the internet. The expected outcomes of this development
will be increased online food shopping and delivery options. These developments will require
me to more conscientious and work towards incorporation of technology in my business
(Dada, Watson and Kirby, 2012)
More Companies transforming to franchises
The future is also expected to see more companies embrace the franchise model in their
operations to expand their operations across boarder business are also expected to use this
model to expand into new territories and markets. This will make it mandatory for me to
incorporate differentiation in my business in and maintain high quality of products to have a
competitive advantage (Webber,2013).
CONCLUSION
In conclusion, there are numerous advantages and disadvantages of a being a franchisee as
compared to being a business owner. Among the common benefits is the fact that franchisees
have an ease of acquiring credit facilities by working with established brands, can
immediately hit the ground running, have an opportunity to operate in their territory without
interference, can acquire constant training and support franchisor and have a reduced risk of
failure. On other hand franchisee operate under rules of the franchisor, are subjected to
limited creativity, lack autonomy and are required to be always on their tools. Working as a
franchisor also differs from working as an entrepreneur in that unlike entrepreneurship, it
requires supervision has limited decision-making abilities and involves more expenses.
Failure to scrutinize franchise agreement and disclosure document are some of the issues that
could go wrong in as far as buying a franchise is concerned. Franchising also involves
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challenges, responsibilities for obligations for both the franchisor and the franchisee on which
they are supposed to abide. After closely analysing the two options and considering my
preferences of autonomy, working with minimal supervision and working in an
environment with unrestricted creativity my decision will therefore be to decline the
offer of selling my existing business The Raw Kitchen Fremantle and becoming a
franchisee under Boost Juice Australia.
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Reference list
Abell, M. (2013). The law and regulation of franchising in the EU. Cheltenham, UK, Edward
Elgar.
Adams, J., Hickey, J. J. B., & Jones, K. V. P. (2006). Franchising: practice and precedents in
business format franchising. Haywards Heath, West Sussex, Tottel Pub.
Alon, I. (2008). Service Franchising a Global Perspective. Boston, MA, Springer
Science+Business Media, Inc. http://dx.doi.org/10.1007/0-387-28256-4.
Dada, O., Watson, A. and Kirby, D.A., 2012. Toward a model of franchisee entrepreneurship.
International Small Business Journal, 30(5), pp.559-583.
Clifton, D. (2008). Franchising on a shoestring: making franchising work for you ... without
breaking the bank. London, A & C Black.
http://public.eblib.com/choice/publicfullrecord.aspx?p=590987.
Davies, M.A., Lassar, W., Manolis, C., Prince, M. and Winsor, R.D., 2011.A model of trust
and compliance in franchise relationships. Journal of Business Venturing, 26(3), pp.321-340.
Kalnins, A., 2010. Important Questions about Franchising: What We Know and What We
Should Know.
Larty, J., 2010. Contribution of franchise research to entrepreneurship: a review and new
opportunities.
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Lewis, J.E., 2009. Business viability: a comparison between franchises and independent
businesses (Doctoral dissertation, North-West University).
Massetti, R. (2007). Is your business right for franchising? Lulu.com.
S., C. (2009). Market Entry Options Franchising, Strategic Alliance, Acquisition. http://nbn-
resolving.de/urn:nbn:de:101:1-201512032928.
SUGARS, B. J. (2007). Successful franchising. https://www.overdrive.com/search?
q=786DD33C-2ABF-4A25-BDA9-BF5FF4571A81.
Spencer, E. C. (2010). The regulation of franchising in the new global economy. Cheltenham,
UK, Edward Elgar.
SPinelli, S., Rosenberg, R., & Birley, S. (2014). Franchising: pathway to wealth creation.
London, FT Prentice Hall.
Verbieren, S., Cools, M. and Van den Abbeele, A., 2008. Franchising: a literature review on
management and control issues. Review of Business and Economics, 53(4), pp.398-443.
Webber, R. (2013). An introduction to franchising. Houndmills, Basingstoke, Palgrave
Macmillan.
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