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Franchising.

One way to avoid some of the management headaches in business is to invest in a franchise, an approach that enables you to use a larger company's trade name and sell its products in a specific territory. In exchange for this right, the franchisee (you, the small business owner) pays an initial fee and often monthly royalties as well to the franchisor (the corporation).

Franchising is not a new phenomenon. It has been around since the nineteenth century, when such companies as Singer and International Harvester established dealerships throughout the world. Early in the 20th century, Coca-Cola, General Motors, and Metropolitan Life Insurance Company, among others, used trademark franchises to distribute or sell their products. But the real boom in franchising began in the late 1950s, with the proliferation of hotels and motels like Holiday Inn and fast-food establishments like Baskin-Robbins, and Dunkin' Donuts.

The latest trend in franchising has been diversification in the variety of products offered. Today over 2,000 companies offer franchises, ranging from day-care centers and health clubs to dental clinics, videotape rental outlets, and funeral parlours. By and large most are service operations. Why is franchising so popular? According to the president of the International Franchise Association, franchising has triple benefits: "The franchisor wins because he builds a strong foundation for his company. The franchisee wins because he can take advantage of the franchisor's proven business system, and the general public benefits from the consistency of the product or service".

The biggest winners are generally the franchisors, who are able to expand their businesses through franchised outlets without depleting their own capital. Take the case of Gymboree, for example. The company, which operates exercise centres for preschoolers, was founded in 1974 by Joan Barnes. Her first centre was an instant success, and she gradually added seven more wholly-owned outlets before deciding to franchise the business in 1980. Since then, 220 franchised centers have been opened, and 100 more have been sold. Investing in a franchise can also be good for the franchisee, because the risk is reasonably low. Only 4 to 6 percent of all franchise outlets go out of business each year. When you invest in a franchise, you know that you are getting a viable business, one that has "worked" many times before. You also have the advantage of instant name recognition and mass advertising. An independent hamburger stand can't afford a national TV advertising campaign, but McDonald's, Burger King, and Wendy's can. In addition to giving you a proven formula, buying a franchise helps you solve one of the biggest problems that small businesses face: lack of money. Franchisors generally use a number of methods to make sure the franchisee is on firm financial footing. Besides financial aid and advice, the franchisor gives a new franchisee training in how to run a business. McDonald's "Hamburger University" in Illinois gives a nineteen-day course to owners and operators, leading to a "Bachelor of Hamburgerology, with a Minor in French Fries." By offering this course, McDonald's is also able to teach standard procedures to each operator and thus maintain its distinctive image. Many franchise organizations offer advice on advertising, taxes, and other business matters, as well as instructions in the routine day-to-day operation of the franchise. Although franchising offers many advantages, it is not the ideal vehicle for everyone. For one thing, owning a franchise is no guarantee of wealth. It may be the safest way to get into business, but it is not necessarily the cheapest. According to some analysts, it costs 10 to 30 percent more to buy a franchise than to open a business independently. One of the most significant financial variables is the monthly payment or royalty that must be turned over to the franchisor. The fees vary widely, from nothing at all to 20 percent of sales. High royalties are not necessarily bad – if the franchisee gets ongoing assistance in return.

Another drawback of franchises is that they allow individual operators very little independence. Franchisors can prescribe virtually every aspect of the business, down to the details of employees' uniforms and the colour of the walls. Franchisees may be required to buy the products they sell directly from the franchisor – at whatever price the franchisor feels like charging. Franchisors may also make important decisions without consulting franchisees. Although most franchise opportunities are legitimate, it pays to be wary. Franchises and "business opportunities" are occasionally fraudulent.

COMPREHENSION CHECK

Exercise 1. Are these statements true or false?

  1. Franchise is one of the most time consuming types of business in the world because organizational difficulties.

  2. The first companies, used franchises to sell its production were General Motors, Coca Cola etc.

  3. You can find any type of production or services in franchise business in our days, but by and large most are services.

  4. There are no proofs for franchising benefits at all.

  5. Franchising is advantageous for both franchisor and franchisee.

  6. Franchising is the most profitable for franchisees.

  7. Investing in a franchise can be good for franchisee because of the low risk.

  8. The franchisee has no right to use brand name, enjoy instant name recognition and mass advertising.

  9. Franchisors don’t give any training to new franchisees.

  10. Owning a franchise is the safest way to get into business, but it doesn’t guarantee wealth.

  11. The sum of royalty depends on the number and quality of assistance get in return.

  12. Very little independence is one of the drawbacks of franchise.

Exercise 2. Answer the following questions.

  1. What is a franchise?

  2. What’s the difference between a franchisor and franchisee?

  3. What are the advantages of franchise?

  4. What are the drawbacks of that type of business?

  5. Why doesn’t a franchise guarantee wealth?

  6. What fees should franchisees pay to franchisor?

  7. What does the sum of fee (royalty) depends on?

  8. Is little independence merit or demerit for a franchisee? Why?

Exercise 3.