Certificate III Small Business Management
Code No: 2304ACC October 11
Western Business Enterprise Centre VUT
Franchising
Franchising offers you the opportunity to get into business FOR yourself but not BY yourself.
The main advantage is that you have the backing of the franchising organisation to guide you.
The biggest disadvantage is that you don't achieve the control and independence you may
normally think of from self-employment.
The term franchise is a marketing tool, used in a number of ways, to describe various business
arrangements across various industries. This arrangement consists of an agreement or
relationship between a parent company (the franchisor), and the individual operator called (the
franchisee). The franchisor offers you a prepacked business, which operates under strict rules
and conditions.
In Australia there is an estimated 1000 plus franchisors and more than 25,000
franchisees. These franchisees operate in various businesses such as,
o Accommodation o Automotive
o Building products o Business Services
o Cleaning & Maintenance o Convenience stores
o Crafts o Education
o Financial services o Food
o Hire or Rental o Household services
o Industrial services o Personal services
o Printing o Real Estate
o Recreation & Leisure o Retail books, gifts
o Retail clothing o Retail General
o Retail household o Retail sports
o Security services o Trade services
o Travel services o Video stores
A franchise contract is a legal agreement between the franchisor and franchisee. The franchisor
sells the right to use trademarks, trade names and business formats to a franchisee. Sometimes
the franchisee also agrees to buy equipment and or supplies from the franchisor. From the
various franchise agreements around, you can group most by, product and trade name
franchises, or business formats.
Product And Trade Name Franchises
Product and trade name franchises refer to a distribution system in which the franchisee is
licensed to sell products manufactured by the franchisor. In some cases the franchisee is
licensed to do the manufacturing as well. e.g. car dealers, petrol stations, and wholesale
distributors.
A manufacturing franchisee buys a licence to produce and sell a product. Patents, moulds,
equipment and production methods are supplied by the franchisor. e.g. soft drink bottlers, photo
finishes etc. A wholesale distributor is franchised to sell a manufactured product to retailers. In
some cases they only sell to the manufactures retail franchises’s. e.g. beer distribution.
Business Format Franchises
Business format franchises are broader in scope than product or trade name franchises. It is
this group which will exhibit spectacular growth in the next ten years. The franchisor provides
product service trademarks and also the entire business format consisting of a marketing plan,
support and operating methods and manuals, training and quality control and on going backup
services. Examples of Business Format Franchise operations are: retail stores, service
business and food service operators.
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Certificate III Small Business Management
Code No: 2304ACC October 11
Western Business Enterprise Centre VUT
In the retail sector chemists have been using franchising for a long time. The franchisor usually
determines the store mix, pricing and promotional policies. The franchisee buys their company
name, their standardised operating system, and sometimes a distinctive, easily recognisable
shopfront or building design.
A survey conducted in 1999 concluded that:
47 franchisors had more than 100 franchisees
140 franchisors had more than 50 franchisees
223 franchisors had more than 10 franchisees
704 franchisors had less than 10 franchisees
387 franchisors failed or ceased operations
There are two groups that keep information on the franchising business. Franchisors
Association of Australia and Australasian Franchisees Association
Overcoming Limited Experience
Franchising allows people with limited experience to become self-employed. You take
advantage of the franchisors knowledge and experience, which you would otherwise have to
build up over a long period of time, through trial and error. As a franchisee you have access to
the franchisor's managerial resources and you can reduce the uncertainty associated with
establishing a new business.
Advantages of Being a Franchisee
o Access to Training and Assistance.
You are provided with training and management assistance. You can expect to be
trained in the mechanics of the franchisors business, and guided in its day-to-day
operations until you are proficient at the job. Additionally management consulting
services and quality control monitoring are usually provided by the franchisors on a
continuing basis.
o Reduced risk of Failure: Government figures show franchisees have a 2.25 times greater
chance of survival than non-franchised small business. Franchising cannot save someone
from incompetence, but does offer a safety net for those staring out.
o Proven Market Position
As a franchisee you get a developed business concept with proven products and
services. Your business has instant pulling power. To develop this pulling power may take
years of promotion and expense by yourself. With franchising you get regional and
national advertising, promotions, and on going market research and goodwill of the
franchisors name product and service.
o Location and Layout
You can expect to get competently designed facilities, floor layout displays and fixtures.
The franchisor has usually designed very efficient facilities based on their experience with
many franchisees and they can help you to avoid functionally or aesthetically poor
facilities. The franchisor can also help you to maximise your store traffic with location
analysis and site assistance.
o Buying Power
You can expect to get some savings through the franchisors centralised bulk purchasing
of products, equipment, supplies, advertising and materials etc.
o Financial Assistance
The franchisor may give you financial assistance by making it possible for you to start out
with less than the full amount of up front costs. Financial assistance can be provided in
the form of trade credit, low interest loans or loan guarantees. With the name of a well-
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Certificate III Small Business Management
Code No: 2304ACC October 11
Western Business Enterprise Centre VUT
known franchisor behind you, your ability to negotiate with financial institutions will be
strengthened.
Disadvantages of Being a Franchisee
o Franchisor Failure
When you establish a small business most of the risk is how you operate it. When you
become a franchisee most of the risk is from your choice of franchisor. While franchising
has a better record of survival than independent small businesses, there have been and
there will be franchisor failures. Not every franchise system is the same, not every
product or service will succeed. Not every franchisor has the business and financial
acumen to survive.
o Franchisees Failures
The failure of just one franchisee can do tremendous harm to the image of an entire
franchise system. This may discourage other would-be franchisees to have second
thoughts on whether to join your franchise. This may weaken the structure of the franchisor
and negate the ability of the franchisor to maintain the support for the organisation.
Interdependence is the strength of franchising when it works well, but it is also a source of
vulnerability when it does not.
o Loss of Independence
You have to conform to standardisation of operations. You cannot make all the rules nor
break them. You may not be popular or profitable in your outlet.
o Contractual Disadvantages
The contract may be written to the advantage of the franchisor. The contract may have
clauses such as, unreasonably high sales quotas, working hours etc.
Most contracts have an expiry date and there may be no guarantee of renewal.
There may be penalty clauses if you wish to terminate your agreement, or sell your
franchise.
o Competitive Restrictions.
Under a franchise agreement you will be restricted in the way in which you establish
selling prices, and /or in introducing additional produce or services or dropping
unprofitable ones. It may sell well in one area, but not in yours.
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