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Business
Chapter 5
Key Notes and Concepts
Franchising = the formal relationship that is established by a franchise contract, a legal document, that enables a firm (franchiser) to expand by allowing an independent businessperson (franchisee) to us the franchiser's operating methods, financing systems, trademarks and products in return for a fee.
Advantages of Becoming a Franchisee:
„h Ability to quickly expand a company with limited capital
„h Training programs and operating manuals that teach the retailer how to operate the business, allowing individuals to enter the business with little previous experience
„h Management consulting may be offered
„h Less cash may be required to enter the business
„h Purchasing power can result I lower costs and higher gross profits for the franchisee
„h National advertising and promotion by the franchiser may exist
„h Merchandise assistance , displays and other materials may be offered by the franchiser
„h Research and development programs that are designed to improve or add new products or services
„h Access to a variety of fringe benefits such as dental plans at lower rates
„h Advice for special problems
Disadvantages:
„h High cost of franchise
„h High royalty rates
„h Too many franchises in a particular geographic area
„h Profit sharing and conditions of termination typically favor the franchiser
Costs of Franchising
An initial fee is usually paid for the right to operate and franchise fees based on monthly sales. Other various costs include initial costs, franchise fee, opening costs, working capital, premise expenses, site evaluation fees, royalties and service fees and promotion charges.
Evaluating the Company
The franchising company should have good credit rating, a strong financial position, and a favorable reputation in the business community. They should also be in business for a sufficient period of time to demonstrate expertise and ability. Product or service testing and warranties should be explored before purchasing.
Application: The number of Subway restaurants that are popping up all over the place. The franchise is still expanding today.