Chapter 3 - Franchises and Co-operatives
Franchises:
★ A franchiser allows a franchisee to use its brand in return for an initial fee and
ongoing royalty payments.
★ Not a legal structure; liability depends on how the franchisee sets up the business.
★ Franchisees have unlimited liability as sole traders/partnerships and limited
liability as companies.
★ Common in many sectors, e.g. McDonald’s, Burger King, The Body Shop.
Advantages for the Franchiser:
★ Can expand without spending large amounts of its own money.
★ Keeps control over products and supplies.
★ Gains continuous income from motivated franchisees.
Disadvantages for the Franchiser:
★ Less control than owning outlets directly; risk to brand image from poor
franchisees.
★ High costs of training, support and monitoring franchisees.
★ Risk of conflict and possible legal disputes with franchisees.
Should a Business Franchise Its Brand?
★ Depends on management attitude, cost, and willingness to lose some
control.
★ Requires a long-term view; not a quick way to make money.
★ Poor franchise performance can harm stakeholders and brand image.
Advantages for the Franchisee:
★ Uses a well-known, proven brand with a higher chance
of success.
★ Receives training, advice and ongoing support.
★ Benefits from franchiser’s marketing and market
research.
★ Often easier to obtain bank loans.
Disadvantages for the Franchisee:
★ Must buy supplies from the franchiser, often at higher prices.
★ Ongoing royalty payments reduce profits.
★ Less control over products and how the business operates.
★ Cannot sell the business without permission.
★ Franchise agreement lasts for a fixed period and is not guaranteed to renew.
Co-operatives:
★ e.g. retail, credit unions, housing.
★ Owned and run by members who use the business.
★ Members elect managers and help shape decisions.
★ Profits are shared among members; co-operatives are businesses, not
charities.
Advantages of a Co-operative:
★ Easy and inexpensive to set up legally.
★ Members and employees share common goals, increasing motivation
and loyalty.
★ Members usually have limited liability.
★ High-quality service encouraged as customers are also members.
★ Stakeholders generally benefit from the cooperative approach.
Disadvantages of a Co-operative:
★ Limited access to capital; banks and investors may be
reluctant.
★ Management may lack business skills.
★ Employees may want higher personal rewards.
★ Decision-making can be slow due to member involvement.
★ No guarantee it performs better than a traditional business.