Franchises

Question 1

What is a franchise?

Answer 1

A franchise is a joint business arrangement between two parties: the franchisor and the franchisee.

Question 2

What is the franchisor?

Answer 2

The franchisor is the original business that has already built a successful brand and developed a proven business model.

It has gained customer loyalty, refined its operations, and shown that the format can be scaled up successfully.

Question 3

What is a franchisee?

Answer 3

The franchisee is someone who buys the right to open and run a branch of that business in a new location.

The franchisee operates under the same name, branding, and systems, and benefits from the experience and support of the franchisor.

Question 4

What are the advantages of being a franchiser?

Answer 4

• Easiest method of expanding without heavy investment
• Provides a steady cash flow from royalty payments
• Shared risk between franchiser and franchisee

Question 5

What are the disadvantages of being a franchiser?

Answer 5

• Only receives a share of the profits
• Poor franchisee can damage company reputation
• A weak franchisee may not return much profit

Question 6

What are the advantages of being a franchisee?

Answer 6

• Reduced marketing costs as the franchiser does this
• Reduced risk as the brand is already establised and you can gain customers/sales quickly
• Franchiser may provide training and administration duties

Question 7

What are the disadvantages of being a franchisee?

Answer 7

• Products, prices, and layout of store may be dictated
• A royalty payment must be paid (often a percent of revenue)
• Initial cost is expensive

Question 8

Advantages of a franchise (achieve)

Answer 8

• Franchising allows the franchisor to grow quickly without needing to invest heavily in new outlets.
• Franchisees take on most of the costs and risks, making it a lower-cost method of expansion.
• For franchisees, the risk of failure is reduced because they are using a proven business model.
• Each franchisee is likely to be highly motivated, as they directly benefit from the success of the outlet.
• Franchisees pay for staff and operating costs, reducing financial pressure on the franchisor.
• Franchise networks can benefit from sharing ideas, knowledge and support across locations.

Question 9

Disadvantages of a franchise (achieve)

Answer 9

• The franchisor may lose some control over the brand as more outlets open.
• Poor performance by one franchisee could damage the reputation of the whole brand.
• Franchisees must pay significant upfront costs and ongoing fees to the franchisor.
• A percentage of profits must usually be shared with the franchisor.
• Franchisees have limited freedom to make changes to products, prices or marketing.
• If the franchisor goes out of business, the franchisee’s outlet may no longer be viable.