READING COMPREHENSION: Franchising

SITUATION: You are employed by a retail organisation that has been very successful in recent
years. The directors of the organisation are now considering if the time has come for them
to operate as a franchisor. This is not a new form of business ownership, but you have been
asked to discover more about it. You have found the following article, which summarises
most of the information you need. Read the article, then answer the questions that follow
to demonstrate your understanding of the points made.

Franchising
Franchising is a well-established method of business. An organisation that has a
successful method of business operation sells to someone the opportunity to operate
a local branch of the business. The ‘parent’ organisation is referred to as the franchisor
and the local organisation is the franchisee. The franchisee trades under the name of
the franchisor, who helps to set up and run the business. The franchisee agrees to use
the corporate logo, and will need to subscribe to the company ethos.
Each franchisee must agree to maintain the corporate image, so all local branches
will look the same. The franchisee’s contract will clearly state the standards regarding
the quality of service, and if the staff have a uniform, this will be the same in every
franchise. A common feature of franchising concerns territorial rights. There is often
an agreement that only a restricted number of franchisees will be able to open a
branch or offer a service in a certain area.
The financial arrangements can vary. Sometimes the franchisor will charge a flat rate
for a period of time, whilst sometimes the franchisee will be charged a percentage
of its sales or profits. There have been many well-known franchises in the past; it is
a common form of ownership in fast food businesses. However, it is possible for this
system to encompass services, processes or even manufacturing.
Advantages of becoming a franchisor
• The franchisor can achieve rapid growth, without a large capital investment.
• The franchisor can retain control of the direction of the business, but the detailed
administration is carried out by the franchisee.
• The franchisee takes the risk of running its local business. If it is not successful, the
franchisor does not make a loss.
• If the franchisor grows, it can achieve economies of scale, such as gaining larger
discounts on bulk purchases.

6
P47019A
 Disadvantages of becoming a franchisor
• There is some cost in setting up a franchise in terms of time and money, and there
are administration costs.
• The franchisor loses control of the details of running the franchise.
• A poor or failing franchisee can damage the reputation of the franchisor.
• A business can expand too quickly, which can cause problems in running the
business efficiently and effectively.
• Applications for favoured areas could be massively oversubscribed, whilst it might
be difficult to find a franchisee in a less popular area.
A franchisee’s viewpoint
Franchisees can invest in a business that is tried and tested, and usually successful.
They can build on the existing reputation of the franchisor, who offers advice and
support. The franchisee can benefit from national marketing and promotion, and
many banks or financial organisations are more prepared to offer loans to franchisees
rather than to those starting a business from scratch. However, in well-known cases,
initial investment can be costly, and the franchisee will not usually retain all the profit.
The franchisee has little opportunity to make local decisions or changes to the nature
of the business. It is not always made easy by the franchisor to sell a local franchise.

7
P47019A
Turn over
 Task

Answer the following questions, in your own words as far as possible, to show
that you have understood what you have read in the article.

(a) Explain what happens in terms of how a business operates when a franchise is
set up.
(4)
(b) What will the franchisee’s business be called?
(1)
(c) What is meant by the term ‘corporate image’? Why should this mean that all
branches look the same?
(3)
(d) What is meant by a franchisee having ‘territorial rights’?
(3)
(e) How does the franchisor gain profit from establishing a franchise?
(2)
(f ) It is stated that a franchisor ‘can achieve rapid growth without a large capital
investment’. What is said to be an advantage of this, and what is a disadvantage?
(3)
(g) Why is a franchise arrangement considered to be an advantage for the franchisor
if a franchisee fails? What would be a disadvantage to the franchisor if this occurs?
(2)
(h) Why do you feel that banks or financial organisations should be more prepared to
offer loans to franchisees rather than those starting a business from scratch?
(3)
(i) You have two friends, John and Jane, who are considering starting a business.
John is very hard working, works well with others but does not like to take a great
risk. Jane is very imaginative, likes trying new ideas and is quite adventurous.
Which of the two would you say is more suited to starting a franchise business?
Give reasons for your answer.
(4)

(Total for Question 3 = 25 marks)

8
P47019A