Franchises – Business Studies A Level

Starting a new business with a new idea requires a huge amount of planning, skill, and perhaps luck, on the part of the business person. Government figures suggest that only 70% of new businesses will survive for three years. This is why some entrepreneurs turn to start a franchise business instead of starting from scratch.
Reasons for the high 70% failure rate is due to:

  • The business idea not being good enough.
  • Other firms copying the idea as they rush into the market.
  • Poor customer review wrecks product or service

Many of these problems can be avoided if the entrepreneur goes for a ‘halfway house’ towards running their own business: a franchise. Research shows that 93% of franchises survive their first three years compared to the 70% of new businesses.

For example, if you start an independent optician service, you have to:
  • Design and decorate a store that will create the right customer image.
  • Create systems for staff training, stock control and accounting.
  • Do your own advertising to bring in customers, and to make them willing to pay the high prices charged by opticians.

Alternatively, you could start up your own, 100% independent limited company, and then sign up for a Specsavers franchise. This would mean, for example, access to the specially written Specsavers store management software. From a scan of a sold pair of glasses, the software ensures that all the necessary stock ordering and accounting actions are taken. The franchise owner (Specsavers) also provides full training for the franchisee (the entrepreneur), plus advice and supplier contacts for store decoration and display and, of course, the huge marketing support offered by a multi-million-pound TV advertising campaign. If you start up J. Bloggs Opticians, how many people will come through the doors? If you open up Specsavers, customers will trust the business from day one.

The franchise owner (also known as the franchisor) needs to establish:
  • A training program so that franchisees learn to do things ‘the Specsavers way’.
  • A system of pricing that is profitable without putting off potential franchisees; usually the franchise rights are bought for £10,000-£100,000, then the franchisee must buy all store fittings and equipment via the franchise owner (this may cost £50,000-£250,000_, and then buy all supplies from the franchise owner; on top of this, a 5% royalty fee is usually paid on all income and a fee of 3-5% to contribute towards the national advertising campaign.
  • A system of monitoring, so that poorly run franchises do not damage the reputation of the brand.

Franchises are run independently the franchisee or entrepreneur. However, the franchisee must work within the rules laid down by the franchise owner. These will cover the store décor, the staff uniforms, the product range, the product pricing, and much else. Yet the franchisee will still have to manage: staff recruitment, training and motivation; stock ordering; quality control and management; effective customer service. 

Negatives of Running a Franchise
It is important to be clear that really independent-minded people might hate to be franchisees; after all, they may want to start their own business to ‘be their own boss’. A franchisee is the boss of the business, but without the normal freedoms of decision making. This could be very frustrating. It will also be important to choose the right franchise. On the fringes of franchising are some dubious businesses that sell the promises of training and advertising support, but supply very little after they have pocketed the franchise fee. As with anything in business, careful research is essential; better franchise operators are members of the British Franchise Association (the bfs). It should also be borne in mind that the franchise owner’s slice of your income may be difficult to make good profit from ‘your’ business.
Positives of Running a Franchise
 A young businessperson could treat being a franchise as wonderful training towards becoming a full entrepreneur: ‘Today I’ll open a Subway; in five years I’ll sell it and open my own restaurant.’ Very few people have the range of skills required of the independent business owner. Who is expert at marketing, buying, store design, window display, staff management, sales, stock control and accounting? This is why the failure rate for independent businesses is so much higher than for franchise businesses. Due to the different failure rates, the attitudes of bankers is very different when you seek finance for a franchise start-up. Ask NatWest for £50,000 to start J. Bloggs Sandwich Shop, and the door will quickly be closed; ask for £50,000 to help finance a Subway outlet and the response will be far more positive. Franchisees find finance easier and cheaper to get. The interest rate charged by a bank for a potential Subway franchisee will be lower than the rate it would charge to the found of an independent business start-up.
Key Terms
Franchisee: A person or company who has paid to become part of a established franchise business (such as Subway or Specsavers).
Franchisor: The owner of the holding company and franchise.
Geographical mapping: Plotting on a map the locations of all the existing businesses in your market (i.e. to show where all your competitors are).
Innovations: New ideas brought to the market.
Market Map: A grid plotting where each existing brand sits on scales based on two important features of a market (e.g. in the car market: luxury/economy and green/gas-guzzling).
Market niche: A gap in the market (i.e. No one else is offering what you want to offer.

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