Chapter 8.3, Problem 5R

To determine

To evaluate: The reasons for which franchise is considered less risky as compared to sole proprietor along with examples.

Explanation of Solution

The key reasons people want to open franchise instead of opening their own companies are the knowledge of the brand and established method of carrying business. When the parent company is already profitable it has found a path to successfully market its goods or services. This method must be acquired by the franchisee, rather than making a new business strategy that may or may not succeed. Some of the advantages of Franchising are as follows:

1. Less capital requirement: Parent corporations typically invest a lot of money on ads. Popular franchise commercials like MD’s, B K, W's, P H etc. The franchisor profits from this they don’t have to pay.
2. Flexibility in commencement procedures: Most franchisors provide flexible financing plans that can take advantage of to pay the initial fee and handle startup costs. They need collaborate with different banks and under their terms, that can easily make use of a loan.
3. Limited liability and less Risk: As franchisor allows franchisee to operate a business that has already expanded its roots in the market therefore percentage of liability risk and liability is low.
4. Market Image: Franchisor by leasing franchising rights is actually expanding its unit to different parts across the domestic as well as international boundaries that gives the unit a sense of loyalty and high reputation.

Because of these advantages, franchise performance rates are far higher than those of independently owned businesses.

Economics Concept Introduction

Introduction: A franchise is a form of license obtained by a party (franchisee) to give them access to the proprietary information, procedures, and marks of a company (franchisor) to permit a party to sell a product or given a servicing under the company name.