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UNIT 13. Franchising

Good planning, financing and management are essential to any type of small firm. This is true whether the firm is a franchisee¹, a newly created firm, or an established firm under new ownership. That franchisees have a lower failure² rate than other new small businesses is due in most cases to the managerial assistance provided by the franchisors³. Failures can occur in any type of small firm when mana­gement does not apply continued good practice in the operation of the firm.

Franchising became very popular in the decade of the 1970s, and this growth has continued in the 1980s. Franchising is basically a system for distributing products or services through associated resel­lers. The franchise⁴ gives rights to the franchisee to perform or use something that is the property of the franchisor. The parent company is the franchisor. The small business owner who buys a franchise is the franchisee.

The objective of franchisees is to achieve efficient and profitable distribution of a product or service within a specified area. Both par­ties contribute⁵ resources. The franchisor contributes a trademark⁶, a reputation, known products, managerial know-how, procedures, and perhaps equipment. The franchisee invests capital in the purchase of the franchise and provides the management of the operation in accor­dance with rules set down by the franchisor. Marketing procedures may be specified, and a common identity is established.

Most franchises can be classified into one of the three categories that follow:

– straight-product-distribution franchises. Under this type of franchise, which is the most popular today, franchisors merely supply the franchisees with their products in salable form and the franchisees sell them in that same form. Auto agencies and appliance shops are prominent examples. The franchisors earn their profit from the price at which they sell to the franchisee.

– product-license franchises. In these cases the franchisees use the franchisor's name but manufacture their products to comply with⁷ the franchisor's requirements. The franchisors provide brand⁸ identity and usually specify methods of manufacturing and/or distributing the product.

– trade-name franchises. Under this type of franchise, the franchisor licenses its trade name to the franchisee but seldom exercises any control over the product or service being marketed. Equipment distributors often use this method of franchise.

Franchising offers its maximum advantages when undertaken with due consideration for the interests of the franchisee as well as the franchisor. The following table lists advantages to both parties.

It is obvious that franchising has taken an important place in the small business field in this country. Many American franchisors have extended their franchises around the world. This significant develop­ment, when handled with proper consideration for both parties, can provide real advantages to both franchisor and franchisee.

1) How would you define a franchise? Is it a new and popular form of running business?

2) What rights are given by a franchise?

3) What are the contacts between franchisor and franchisee based on?

4) Franchising offers advantages and has disadvantages for a fran­chisor and a franchisee. What are they for both parties?

5) What categories are franchises classified into?

6) What is a trade-mark franchise?

2. In each of the following, select the word or phrase which best completes the statement or answers the question.

1) A franchised business is owned by

a. government c. stockholders

b. franchisor d. franchisee

2) A franchise business does not have to be

a. large c. expensive

b. a fast-food operation d. all of these

3) Franchises include all of the following kinds of business except

a. retailing c. government services

b. wholesaling d. manufacturing

4) Franchises will probably

a. increase in number c. remain the same

b. decrease in number d. be made illegal

5) Which one of the following would most likely not be a franchised business?

a. radio station c. gas and electric company

b. auto dealership d. gas station

6) The right to grant a franchise agreement is reserved to the

a. parent company c. vendor

b. franchisee d. license

7) Franchise fees are

a. paid to the franchisor c. based on the size of the territory

b. based on sales volume d. could be any or all of these

8) There are franchise agreements that have clauses covering

a. sales quotas c. purchasing and use of products

b. termination agreements d. all of these topics

9) A franchise is a good way for a person to

a. get business experience

b. get started in business with limited capital

c. get rich

d. meet competition

10) One of the disadvantages of owing a franchise business is that

a. the parent companies have standardized products and procedures

b. a franchise business requires less cash to start

c. the franchise may have a better chance of succeeding

d. the owner cannot sell other companies' products

WORD STUDY

3. Match the words with their definitions.

franchise, trade-mark, ownership, failure, profitable, to earn, licence, cost, investment, expenses

1) Sums of money spent on the running of a business in such a way that they do not add to the value of its assets.

2) A special mark that is placed on a particular brand of article or commodity to distinguish it from similar goods sold by other producers.

3) Formal permission in writing, from an authority recognized by law, to perform an act with, without that permission, would be unlawful.

4) Lack of success; inability to pay debts; insolvency, bankruptcy.

5) To get something especially by working.

6) The act of using money to obtain income or profits; money invested.

7) An arrangement by which a monopoly producer gives another producer or trader by formal licence the exclusive right to manu­facture, or sell the products in a certain area.

8) The price paid for something.

9) The right to hold a thing entirely as one's own, including com­plete and permanent control over it.

10) Paying a profit; producing an income; useful.

4. Supply the sentences with the missing words.

know-how, shares, in accordance with, to comply with, distribution, contribution, supply, available, exist, to share

1) There are a growing number of women who want ... some of the traditional male roles.

2) New products must ... certain standards.

3) The United Kingdom had to make a ... of £1 000 million to the EU budget.

4) They are almost totally dependent on Western … .

5) A week ago the firm's ... jumped from 10 percent to 114 percent.

6) Education is carried out ... the principles of the school.

7) More information becomes ... through the use of computers.

8) Unions took strike action to stop the production and ... of the local newspaper.

9) Economic stability can only be reached if demand and ... are in approximate balance.

10) Communities who live by hunting and gathering still … .

5. Find words in the text to complete the following expressions

under new ...	supply their products in ...
a lower failure ...	offers its maximum ...
a system of distributing ...	possible financial ...
the parent company is ...	freedom in management ...

Noun	Adjective	Verb
profitability	profitable	profit
efficiency
health
appropriacy
operation
finance
productivity
management

a) … 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 this century, Coca-Cola, General Motors, and Metropolitan Life Insurance Company, among others, used … to distribute or sell their products. But the real boom in … 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 … has been diversification in the variety of products and services offered. Today, over 2000 companies offer … ranging from day-care centers and health clubs to dental clinics, video-tape rental outlets, and funeral parlors. By and large, most are service operations.

b) The best way to protect yourself from a poor … investment is to study the opportunity very carefully before you commit your­self. Since 1978, the Federal Trade Commission has required … to disclose information about their operations to prospective … . By studying this information, you can determine the financial condi­tion of the … and ascertain whether it has been involved in law­suits with … .

Another good source of information about a … is other … . Find out what they think of the opportunity. If they had it to do over again, would they still invest? That’s the bottom line.

GRAMMAR FOCUS

8. Complete the following sentences by putting the verbs into either the Present Perfect or Past Simple.

1) We (reach) our targets last year.

2) Sales (fall) since the beginning of June.

3) Contracts (be signed) but work (not begin) yet.

4) The marketing department (recruit) two new assistants so far this year.

5) We (start) the advertising campaign last month and since then sales (rocket).

6) Turnover (rise) dramatically since we (be founded).

7) We (expect) a fall in profits last year as our costs nearly (double).

8) We (sell) already more units this year than we (do) in the whole last year.

9. Choose from the modal verbs below in order to complete the dialogue

must

may

can

have to

could

should

B: Well, it's very difficult to say. They ... well be. However, we prefer to put it on the conservation side.

A: I ... say I find these figures hard to believe. After all, a com­pany that wanted to create a brand would ... pay a fortune in advertising alone.

B: Yes, that's true, but you ... not put a figure on brand creation – it depends on so many factors.

A: I agree, but we ... calculate from a historical basis.

B: That's not the point. The real value is the long-term potential profit. How ... you estimate them?

A: Well, you ... have annual sales forecasts?

B: Of course, but if we are going to value them in the balance sheet, we ... have a longer-term perspective.

A: In my opinion what you ... do it... take ten years' potential net income.

10. Complete the following sentences, using an appropriate verb of speaking and preposition, where necessary (speak, tell, talk, say).

1) He ... us that some managers rate each subordinate by different standards.

2) He ... to us ... shifting standards.

3) He ... that to be effective, the appraisal method must be seen to be fair.

4) He ... to us ... how personal biases distort rating.

5) He ... that an increasing number of organizations deal with the problem of bias by asking for explanations of ratings.

6) Then we ... about rating styles.

7) He ... about the different patterns of raters: some rate harshly, others rate easily.

8) He ... us that the lack of uniform rating standards is unfair to employees.

9) We ... to him that we thought it was also unfair to organizations.

1. The three basic methods of becoming a small firm owner are:

1) To buy a franchise.

2) To buy an established business.

3) To create a new business firm.

What method would you choose and why?

2. Look through the list of advantages and disadvantages for both parties and give your analyses of this problem.

WRITING

1. Write a summary of the text.