The Franchise Alternative

One way to avoid some of the management headaches associated with starting a business is to invest in a franchise, an approach that enables you to use a larger company’s trade name and sell its products and services in a specific territory. In exchange for this right, the franchisee pays an initial fee and often monthly royalties as well to the franchiser (the corporation).

There are three basic types of franchises. In a product franchise, the franchisee pays the franchising company for the right to sell trademarked goods, which are purchased from the franchiser and resold by the franchisee. Car dealers and gasoline stations fall into this category. In a manufacturing franchise, like a soft-drink bottling plant, the franchisee is licensed by the parent company to produce and distribute its products, using supplies purchased from the franchiser. In a business-format franchise, the franchisee buys the right to open a business using the franchiser’s name and format for doing business. The fast-food chains typify this form of franchising.

Franchises account for about one third of all retail sales in the United States and employ 7 million people.

Franchising 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 and General Motors, among others, used franchises to distribute or sell their products. But the real boom in franchising began in the late 1950s, with the proliferation of hotels and motels like Holiday Inn and fast-food establishments like McDonald’s and Baskin-Robbins.

The latest trend in franchising has been diversification in the variety of products and services offered. Today, franchises range from day-care centers and health clubs to dental clinics and video-tape rental outlets. By and large, most are service operations.

Advantages of Franchising

Why is franchising so popular? According to the president of the International Franchise Association, franchising has triple benefits: “The franchiser wins because he builds a strong foundation for his company. The franchisee wins because he can take advantage of the franchiser’s proven business system. And the general public benefits from the consistency of the product or service."

The biggest winners are generally the franchisers, who are able to expand their businesses through franchised outlets without depleting their own capital. Franchisers not only expand their business using other people’s money, they also receive regular income from franchisees, who pass on a percentage of their gross revenues and help pay for advertising and promotional costs.

Investing in a franchise can also be good for the franchisee, because the risk is reasonably low. Ninety-two percent of all franchise outlets make it through their fifth year. When you invest in a franchise, you know that you are getting a viable business, one that has “worked” many times before. You also have the advantage of instant name recognition and mass advertising. An independent hamburger stand can't afford a national TV advertising campaign, but McDonald’s, Burger King, and Wendy’s can. Few franchisees are able to write a check for the amount of the total investment. Most obtain a loan to cover at least part of the cost. According to the Department of Commerce, 16 percent of all franchisers provide some form of financial assistance such as low-rate loans. Another 34 percent assist the franchisees in preparing loan applications for banks, private investors, or the Small Business Administration.

Besides financial aid and advice, the franchiser gives a new franchisee training in how to run a business.

Although franchising offers many advantages, it is not the ideal vehicle for everyone. For one thing, owning a franchise is no guarantee of wealth. It may be the safest way to get into business, but it is not necessarily the cheapest. According to some analysts, it costs 10 to 30 percent more to buy a franchise than to open a business independently. And not all franchises are extremely profitable operations.

One of the most significant financial variables is the monthly payment or royalty that must be turned over to the franchiser. The fees vary widely, from nothing at all to 20 percent of sales.

Another drawback of franchises is that they allow individual operators very little independence. Franchiser can prescribe virtually every aspect of the business, down to the details of employees’ uniforms and the color of the walls. Franchisees may be required to buy the products they sell directly from the franchiser at whatever price the franchiser feels like charging. Franchisers may also make important decisions without consulting franchisees.

2. Match the terms with their definitions:

1. franchise 2. franchising 3. franchisee 4. franchiser	a. a corporation that grants a franchise to an individual or group
	b. a person or group to whom a corporation grants an exclusive right to the use of its name in a certain territory, usually in exchange for an initial fee plus monthly royalty payments
	c. a formal agreement for someone to sell a company's products or services in a particular place, in exchange for a payment or part of the profits
	d. a business arrangement whereby an individual obtains right from a larger company to sell a well-known product or service

3. Find in the text the English equivalents for the following Russian terms:

Франчайзинг; франшиза; франчайзер (франшизодатель); франчайзи (франшизополучатель); франчайзинг товара; производственный франчайзинг; франчайзинг организации бизнеса (формата бизнеса); диверсификация; агенство, представительство (фирмы); финансовая переменная; торговая точка, работающая на основе франчайзинга.

5. Read the text again picking out the advantages and disadvantages of franchising for a franchiser and a franchisee, list them in the following chart.

Advantages		Disadvantages
for a franchiser	for a franchisee	for a franchiser	for a franchisee

6. Answer the following questions on the contents of the text.

1. Why is franchising said to help avoid some problems associated with starting a business?

2. What are the two parties in franchising?

3. How many types of franchises are defined in the text?

4. What type of franchise is used when a franchisee makes and distributes the products licensed by the parent company?

5. Is franchising a new phenomenon? Since when has it been known?

6. What have been the recent trends in franchising?

7. Why does the franchiser win by selling a franchise?

8. Is buying a franchise a guarantee of success and profit for a franchisee?

9. What is often more costly – buying a franchise or opening a business independently?

10. Who has more freedom in business – franchisees or independent business operators?

7. Give a gist of the contents of the text.

Text 3

Complete the questionnaire below and analyze the results using the directions given after it. The language of the questionnaire is rather informal and abounds in phrasal verbs; to cope with this difficulty you may first do Activities11-12 from the Language section.