Unit 1 Topic 1.1.6

Must learn: the principles of franchising

Should learn: Advantages and disadvantages of using franchise as a mean of business

Could learn: to evaluate franchising against other business start-up options

Brain storm – What does franchise mean?

Franchise

Toni&Guy hairdressers is a franchise

Toni&Guy is a brand and is associated with high quality and service

Entrepreneurs can pay a fee to Toni&Guy so they can use the brand name

However they stay as independent businesses

An entrepreneur would own a part of the business (franchise) they have set up, than they would pay royalties to the brand.

It is how many businesses have expanded such as KFC and McDonald’s.

You can run the business yourself and still have support from the brand.

It is usually cheaper than starting a business from scratch by yourself.

Franchisee – a business that agrees to manufacture, distribute the right to sell its product, under license by a franchisor.

Franchisor – the business that gives franchisees the right to sell its product, in return for a fixed sum of money or a royalty payment

Training – franchisees usually receive training from the franchisor

Equipment – most franchisors provide equipment to entrepreneurs as part of a total package, some may sell equipment.

Materials - to use in the product good or service – Franchisors typically sell their franchisees some or all of the materials used in production.

Finding Customers – you can find new customers through national advertising, publicity and the brand name which brings reputation.

Back-Up Services – some will offer services such as loans, advice and insurance cover for example.

A brand name – known nationally, regional managers, high standards, checks, consistency and expectations.

Exclusive Area – Often a new franchise will be given an exclusive area in order to draw new customers eliminating competition.

What is a Franchise?

Who is the Franchisor?

Who is the Franchisee?

• It is costly to start up, the franchisor won’t give everything up for nothing

• The British Franchise Association reveal that on average it can cost £250,000 to start up a franchise

• It all depends on the franchise, the bigger it is the more expensive it is to start

• The Franchisor will normally charge a fee to start off with to cover the starting costs of the business.

• Then they usually charge a fee, or royalty, measured as a proportion of the value of everything sold.

• For example it could be a 10% fee of sales.

• The Franchisor should select people from those who want to buy a franchise, this way they can select the right people.

• The Franchisor sets out at the start how much money the franchisee needs to put into the business.

• The formula (business model) has already been tried and tested

• Support – e.g. Quality control or tax problems

• Initial Investment is very high especially for large well-known brands and franchisors.

• When it comes to selling the business or closing it down you need permission from the franchisor.

• The Franchisor can end the agreement and shut you down whenever they want to.

Which two of the following would be the most likely advantages to a new business becoming a McDonalds Franchise

A. Working in an area where no other McDonalds is allowed to be set up

B. Having to arrange your own insurance and loansC. Making a loss in the first yearD.Starting from scratch to find your own customersE. Being part of a business that is a household nameF. Training Staff in a new business

Name 2 Costs/Drawbacks of setting up a Franchise?

Name 2 Benefits of setting up a Franchise?

The location of your Franchise is very important

Locations usually have to be somewhere busy in the centre of town so that customers can easily get there

McDonalds for example place there outlets in town centres or in places where people can park their car

However...it depends on the brand.

For example domestic cleaning service franchise or a sign making business can be located either at home on a industrial estate.

Where would you locate a rent-a-car franchise?

To summarise...

If you make or sell a product it is important to locate your franchise near to your customer.

If it is a service than usually you go to the customer and can operate from home or low-cost offices.

a) Franchisees sell the right to make a product to franchisors

b) Franchisees receive a royalty from franchisors

c) Franchisees receive training and support from franchisors

d) Franchisees sell materials for use in production to franchisors

a) The franchisor provides a tried and tested product to sell

b) The franchisor pays the franchisee to set up in business

c) The franchisee receives on-going help and support

d) The franchisor is responsible for paying the taxes

e) Franchisees do not need to have so many business skills as people who set up on their own.

Write a report about the issues that people need to consider when they want to start and run a franchise.