Muhammad Asad Abbas

[Link] (Business Administration)

There are many different players in the leasing business. Some vendors, such as Dell, lease
directly to businesses. As with banks, the vendors look for lease clients with good credit
backgrounds and the ability to make the lease payments. There are also venture-leasing firms
that act as brokers, bringing the parties involved in a lease together. These firms are acquainted
with the producers of specialized equipment and match these producers with new ventures
that are in need of the equipment. One of the responsibilities of these firms is conducting due
diligence to make sure that the new ventures involved will be able to make timely payments on
their leases.

Most leases involve a modest down payment and monthly payments during the duration of the
lease. At the end of an equipment lease, the new venture typically has the option to stop using
the equipment, purchase it at fair market value, or renew the lease. Lease deals that involve a
substantial amount of money should be negotiated and entered into with the same amount of
scrutiny as when getting financing or funding. Leasing is almost always more expensive than
paying cash for an item, so most entrepreneurs think of leasing as an alternative to equity or
debt financing. Although the down payment is typically lower, the primary disadvantage is that
at the end of the lease, the lessee doesn’t own the property or equipment. Of course, this may
be an advantage if a company is leasing equipment, such as computers or copy machines,
which can rather quickly become technologically obsolete.

Explain franchising and how it differs from other forms of business ownership.

Franchising is a form of business organization in which a firm that already has a successful
product or service (franchisor) licenses its trademark and method of doing business to other
businesses (franchisees) in exchange for an initial franchise fee and an ongoing royalty.

What Is Franchising?

The word franchise comes from an old dialect of French and means “privilege” or “freedom.”
Franchising has a long history. In the Middle Ages kings and lords granted franchises to specific
individuals or groups to hunt on their land or to conduct certain forms of commerce. In the
1840s, breweries in Germany granted franchises to certain taverns to be the exclusive

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distributors of their beer for the region. Shortly after the U.S. Civil War, the Singer Sewing
Machine Company began granting distribution franchises for its sewing machines and
pioneered the use of written franchise agreements. Many of the most familiar franchises in the
United States, including Kentucky Fried Chicken (1952), McDonald’s (1955), Burger King (1955),
Midas Muffler (1956), and H&R Block (1958), started in the post–World War II era of the 1940s
and 1950s.

The Comfort Keepers business idea lends itself to franchising because the company has a good
trademark and a good business method. Moreover, because the nature of the business keeps
the cost of starting a Comfort Keepers franchise relatively low, there is a substantial pool of
people available to purchase the franchise. For Comfort Keepers and its franchisees, franchising
is a win win proposition. Comfort Keepers wins because it is able to use its franchisees’ money
to quickly grow its business and strengthen its brand. The franchisees win because they are able
to start a business in a growing industry relatively inexpensively and benefit by adopting the
Comfort Keepers trademark and method of doing business.

How Does Franchising Work?

There is nothing magical about franchising. It is a form of growth that allows a business to get
its products or services to market through the efforts of business partners or “franchisees.” a
franchise is an agreement between a franchisor (the parent company, such as Uptown
Cheapskate or Comfort Keepers) and a franchisee (an individual or firm that is willing to pay the
franchisor a fee for the right to sell its product, service, and/or business method). Planet
Smoothie, for example, is a very successful franchise system. The franchisor (Planet Smoothie,
Inc.) provides the rights to individual businesspersons (the local franchisees) to use the Planet
Smoothie trademark and business methods. In turn, the franchisees pay Planet Smoothie a
franchise fee and an ongoing royalty for these privileges and agree to operate their Planet
Smoothie restaurants according to Planet Smoothie Inc.’s standards.

There are two distinctly different types of franchise systems: the product and trademark
franchise and the business format franchise. A product and trademark franchise is an
arrangement under which the franchisor grants to the franchisee the right to buy its products

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and use its trade name. This approach typically connects a single manufacturer with a network
of dealers or distributors. For example, General Motors has established a network of dealers
that sell GM cars and use the GM trademark in their advertising and promotions. Similarly,
ExxonMobil has established a network of franchisee-owned gasoline stations to distribute its
gasoline. Product and trademark franchisees are typically permitted to operate in a fairly
autonomous manner. The parent company, such as GM or ExxonMobil, is generally concerned
more with maintaining the integrity of its products than with monitoring the day-to-day
activities of its dealers or station owners.

The second type of franchise, the business format franchise, is by far the more popular
approach to franchising and is more commonly used by entrepreneurs and entrepreneurial
ventures. In a business format franchise, the franchisor provides a formula for doing business to
the franchisee along with training, advertising, and other forms of assistance. Table below
shows 10 industries in which business format franchises have a significant presence. While a
business format franchise provides a franchisee a formula for conducting business, it can also
be very rigid and demanding. For example, fast-food restaurants such as McDonald’s and
Burger King teach their franchisees every detail of how to run their restaurants, from how many
seconds to cook french fries to the exact words their employees should use when they greet
customers (such as “Will this be dining in or carry out?”). Business format franchisors obtain the
majority of their revenues from their franchisees in the form of royalties and franchise fees.

10 Industries in Which Business Format Franchises Are Used Prominently

 Automotive
 Business Services
 Commercial & Residential Services
 Food Retailing
 Lodging
 Personal Services
 Quick Service Restaurants
 Real Estate

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 Retail Products & Services

For both product and trademark franchises and business format franchises, the franchisor–
franchisee relationship takes one of three forms of a franchise agreement . The most common
type of franchise arrangement is an individual franchise agreement. An individual franchise
agreement involves the sale of a single franchise for a specific location. For example, an
individual may purchase a Play It Again Sports franchise to be constructed and operated at 901
Pearl Street in Boulder, CO.

An area franchise agreement allows a franchisee to own and operate a specific number of
outlets in a particular geographic area. For example, a franchisee may purchase the rights to
open five Play It Again Sports franchises within the city limits of Sioux Falls, SD. This is a very
popular franchise arrangement, because in most cases it gives the franchisee exclusive rights
for a given area.

Finally, a master franchise agreement is similar to an area franchise agreement, with one major
difference. A master franchisee, in addition to having the right to open and operate a specific
number of locations in a particular area, also has the right to offer and sell the franchise to
other people in its area. The people who buy franchises from master franchisees are typically
called sub franchisees.

A person who owns and operates more than one outlet of the same franchisor, whether
through an area or a master franchise agreement, is called a multiple-unit franchisee. For the
franchisee, there are advantages and disadvantages to multiple-unit franchising. By owning
more than one unit, a multiple- unit franchisee can capture economies of scale and reduce its
administrative overhead per unit of sale. The disadvantages of multiple-unit franchising are that
the franchisor takes more risk and makes a deeper commitment to a single franchisee. In
general, franchisors encourage multiple-unit franchising.

By selling an additional franchise to an existing franchisee, a franchisor can grow its business
without adding to the total number of franchisees with whom it must maintain a relationship to
conduct its business.
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Describe the advantages of establishing a franchise system as a means of firm growth.

There are two primary advantages to franchising. First, early in the life of an organization,
capital is typically scarce, and rapid growth is needed to achieve brand recognition and
economies of scale. Franchising helps a venture grow quickly because franchisees provide the
majority of the capital. For example, if Comfort Keepers were growing via company-owned
outlets rather than franchising, it would probably have only a handful of outlets rather than the
more than 700 it has today. Many franchisors even admit that they would have rather grown
through company-owned stores but that the capital requirements needed to grow their firms
dictated franchising.

Second, a concept called agency theory argues that for organizations with multiple units (such
as restaurant chains), it is more effective for the units to be run by franchisees than by
managers who run company-owned stores. The theory is that managers, because they are
usually paid a salary, may not be as committed to the success of their individual units as
franchisees, who are in effect the owners of the units they manage.

Advantages of Franchising as a Method of Business Expansion

Rapid, low-cost market expansion: Because franchisees provide most of the cost of expansion,
the franchisor can expand the size of its business fairly rapidly.

Income from franchise fees and royalties. By collecting franchise fees, the franchisor gets a
fairly quick return on the proprietary nature of its products/services and business model. The
franchisor also receives ongoing royalties from its franchisees without incurring substantial risk.

Franchisee motivation. Because franchisees put their personal capital at risk, they are highly
motivated to make their franchise outlets successful. In contrast, the managers of company-
owned outlets typically do not have their own capital at risk. As a result, these managers may
not be prone to work as hard as franchisees or be as attentive to cost savings.

Access to ideas and suggestions. Franchisees represent a source of intellectual capital and
often make suggestions to their franchisors. By incorporating these ideas into their business

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model, franchisors can, in effect, leverage the ideas and suggestions of their individual
franchisees.

Cost savings. Franchisees share many of the franchisors’ expenses, such as the cost of regional
and national advertising.

Increased buying power. Franchisees provide franchisors increased buying power by enlarging
the size of their business, allowing them to purchase larger quantities of products and services
when buying those items.

Faster Market Penetration. A franchise model enables rapid market entry and geographical
expansion, allowing the brand to establish a strong presence in multiple regions faster than
company-owned growth.

Leverage Local Knowledge and Expertise. Franchisees are typically local business owners who
understand their market, customer preferences, and regional business regulations, leading to
better operational success.

Economies of Scale. As the franchise network expands, the business can benefit from bulk
purchasing power, improved supply chain efficiency, and enhanced brand recognition.

Increased Innovation and Adaptability. Franchisees often provide valuable feedback and
insights from their markets, helping the franchisor innovate and adapt to changing customer
preferences.

Overall, franchising is an effective way for firms to expand quickly, reduce financial risk, and
leverage entrepreneurial drive, making it an attractive model for sustainable growth.

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