4. The Franchise Tag

The following topics will be addressed in this post:

What is the difference between a franchisee and a company owned store within a franchise chain? Why might one prefer to be the franchisee or the manager of a company owned store?

A franchise may be defined as “a legal agreement that allows one business to be operated using the name and business procedures of another” (Katz and Green). One of the many ways entrepreneurs can enter the business world is through the franchising process. Indeed, my paternal grandmother owned a sole-proprietorship restaurant, but my maternal grandparents chose to purchase a franchise from Western Auto. They operated the business for over two decades and ultimately they sold it upon their retirement. During this time, they employed dozens of people and extended credit to hundreds of people.

Generally, franchising firms have some company stores and some franchise locations. Company stores are wholly owned and operated by the parent organization. In the company stores, the parent organization hires the staff, develops the goods and services offered, conducts marketing research and campaigns. Moreover, company stores fall under the legal and financial aegis of the corporation. The revenues and expenses are part of the parent organization operations and some profits can be returned to shareholders (Nickels, McHugh, and McHugh).

On the other hand, franchise locations are operated by individuals or groups that acquire the franchise from the parent organization. Typically, franchise agreements require franchisees to adhere to strict operating rules that resemble or exactly model the parent organization. The franchisee operates the location on a daily business, but is subject to inspection and correction from the franchisor. Franchisees are responsible for their own financial and legal requirements, and any profits (excluding royalty fees) stay with the franchisee (Katz and Green).

The literature provides a generally consistent list of advantages and disadvantages to franchises. For franchisees, advantages include help from the franchisor, established marketing campaigns, and market recognition; and disadvantages include low levels of control over the business and potentially strict contractual obligations. For franchisors, advantages include increased revenue streams with low risk, but disadvantages include imperfect control over the franchise with risk of legal liability if the parent organization attempts to exert too much control over the franchise (Katz and Green, Kubasek et al., Nickels, McHugh, and McHugh).

Given the two options of managing a company store or becoming a franchisee people would make the choices based upon their experience, career goals, and financial resources. For individuals without much experience running a business or modest financial resources, managing a company store would be a good place to begin a career. All the resources are provided at no risk to the individual, so the focus will be on management procedures and techniques. Also, this path permits potential career advancement through the parent organization. For individuals with experience and financial means, becoming a franchisee may best suit their personal, lifestyle, and financial desires. While the franchisee carries some risk of failure, the entrepreneurial feeling and financial rewards are significant enough to merit the risk.

Some franchising resources:

http://www.entrepreneur.com/franchise500/index.html

http://www.franchise.com/

http://www.franchise.org/

Sources:

Katz, J.A. and Green, R.P. (2009) Entrepreneurial small business, Second edition. McGraw-Hill: New York.

Kubasek, N.K., Browne, M.N, Herron, D., Giampetro-Mayer, A., and Barkacs, L. (2009) Dynamic business law: The essentials. McGraw-Hill: New York.

Nickels, B., McHugh, J., and McHugh, S. (2008) Understanding business, Eighth edition. McGraw-Hill: New York.

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One Response to 4. The Franchise Tag

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