Chapter Two

Creating and Developing a New Business

2.1 Legal form of a business organization
These are the basic forms of business ownership:

2.1.1 Sole proprietorship:

A type of business unit where one person is solely responsible for providing the capital
and bearing the risk of the enterprise, and for the management of the business is called sole
proprietorship. It is a business owned by only one person. It is easy to set-up and is the least
costly among all forms of ownership.

The owner faces unlimited liability; meaning, the creditors of the business may go after
the personal assets of the owner if the business cannot pay them. The sole proprietorship
form is usually adopted by small business entities.

Characteristics of sole proprietorship form of business organization:

a. Single Ownership: The sole proprietorship form of business organization has a single
owner who himself/herself starts the business by bringing together all the resources.

b. No Separation of Ownership and Management: The owner himself/herself manages the

business as per his/her own skill and intelligence. There is no separation of ownership and
management as is the case with company form of business organization. A sole proprietor
contributes and organizes the resources in a systematic way and controls the activities
with the objective of earning profit.

c. Less Legal Formalities: The formation and operation of a sole proprietorship form of
business organization does not involve any legal formalities. Thus, its formation is quite
easy and simple.

d. No Separate Entity: The business unit does not have an entity separate from the owner.
The businessman and the business enterprise are one and the same, and the businessman is
responsible for everything that happens in his business unit.

e. No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same
time, the entire loss is also borne by him. No other person is there to share the profits and
losses of the business. He alone bears the risks and reaps the profits.

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 f. Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his
business assets are not enough to pay the business liabilities, his personal property can also
be utilized to pay off the liabilities of the business.
g. One-man Control: The controlling power of the sole proprietorship business always
remains with the owner. He/she runs the business as per his/her own will.
Advantages of Sole proprietorship:

 Ease of organization and termination: the sole proprietorship is the simplest type of business
organization that can be formed. It is not necessary to obtain special permission from the
government to operate and terminate this type of business.
 Freedom of action and control: the owner of the sole proprietorship is the boss. The owner can
operate the business in the way he or she desires. As long as regulations are not disobeyed, the sole
proprietor has almost complete freedom to manage the business. The owner sets the policies, hires
and fires the employees, and may even make mistakes in learning how to create a successful
business, long hours, pressures, and many worries are all part being the sole proprietor of a business.
Make sure you are willing to take the responsibility for operating a business by yourself.
 Less Government regulations: there are rules and regulations that govern all types of
business organization. The sole proprietorship has the fewest government regulation to
follow.
 Small tax burden: the sole proprietors profit is taxed as personal income. Compared with
other form of ownership, this is considered an advantage.
 Complete ownership of all profit: sole proprietor is the only form of business ownership in which
rewards and profits go hand in hand. All of the profits of sole proprietorship belong to the owner
(sole proprietor) so this gives a great incentive to the proprietor, to apply the best of his/her ability in
running the business.
 High credit standing: creditors like banks and other lending institution are often more willing to
give credit to proprietorship than to corporations in which the owners are not personally liable for
business debts. The creditor can claim not only the assets of the business but also the proprietors’
personal assets such as house, car etc.
 Business secrecy: in sole proprietorship, it is easy to maintain business secrets. A proprietor can
make any change regarding the business without the knowledge of the others. If confidential
information is a key to success of the business, it is unlikely that its owner will disclose this
information to others. Maintaining business secrets is very important in competitive situations.
Disadvantages of Sole proprietorship:

Difficulty of raising capital: it is very hard for sole proprietor to borrow many than partners or
corporations. When one individual is involved, the risk of a loan is greater.
Lack of assistance/limited management skills: A single manager is not normally capable of
running a large business without the assistance of experts in management function such as
marketing, finance etc.
Unlimited liability: all assets owed by the sole proprietor, both business and personal are
subjected to claims of business creditors. In sole proprietorship the risks are not shared with any
other people the proprietor is solely responsible for all business risk.

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 Limited life: the life of the sole proprietorship is ended by the death or mental or physical
disability of the owner.
Difficulty in hiring employees: the sole proprietor may find it hard to attract and keep competent
employee. Potential employees may feel that there is no room for advancement in firm whose
owner assumes all managerial responsibilities.

2.1.2 Partnership

A partnership is a business owned by two or more persons who contribute resources into the
entity. The partners divide the profits of the business among themselves. It may be formed when
one owner takes on another owner to expand the business, or it may be initially organized as a
partnership.

There are two types of partnerships; the general partnership and limited partnership. In a general
partnership, all partners have unlimited liability. A limited partnership is structured so that at least one
partner (the general partner) has limited liability for the debts of the business.

Article of partnership is an agreement among partners describing the duties and responsibilities of each
partner in the business. In Article of partnership, partners’ rights and duties should be stated explicitly.
These articles are drawn up during the pre-operating period and should cover the following items:

 Date of formation of the partnership;

 Name and address of all partners;
 Nature of the business;
 Name and location of the business;
 Duration of the business;
 The contribution of each partner;
 Sharing ratio for profit and losses;
 Specific duties of each partner;
 Limitation on withdrawal of funds from the business;
 Accounting procedures.
 Salary or drawing account arrangements of each partner;
 How the partnership will be terminated;
 Method to be followed to admit a new partner to the partnership.

Advantages of partnership:

 There are additional abilities, skills, and ideas: a partnership is likely to be operated more
efficiently than a proprietorship because two or more people involved in a business and a wide
range of abilities, skills, idea they can bring to the business.
 Division of responsibilities: the owners of a business have numerous duties that must be
performed successfully. If there is more than one owner, the responsibilities can be divided. For
example one partner could be responsible for the bookkeeping, and the other partner could be
responsible for sales. In this way the business could be operated more efficiently.

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  Increased source of capital: although most partnerships have few members, multiple ownerships
still provides considerably expanded financial resources when compared to sole proprietorship. The
personal wealth and credit of all the partners may be pooled to provide the capital need for a large
operation or for a firmer financial base for small business.
 Ease in obtaining credit: in the case of partnership the creditors can claim all of the general
partner’s personal property if the property of the business is not enough to cover the debt. But if the
business form is sole proprietorship they can claim one person property if the business property is
not sufficient to cover the debt.
 Tax advantage: partnerships are taxed only as an organization. Individual incomes of partners
from profit sharing of partnerships are not taxed separately.
 Ease of starting and little government control: like sole proprietorships, partnerships generally
are easy to organize, with few legal requirements.

Disadvantages of partnership:

 Unlimited liability: although this point will make the partners not to be careless, it might make
partners fear of taking advantages of sudden business opportunities. Related to this point, if the
assets of the partnership are not sufficient to meet the obligations, creditors may choose to sue any
or all to satisfy the debts. Hence, this poses a serious handicap for the individual partner as he/she
may be obliged to repay from his/her personal asset and claim later.
 Lack of continuity: death, incapacity, or withdrawal of a partner terminates a partnership and
necessitates liquidation or reorganization of the business. Liquidation often results in substantial
losses to all partners. It may be legally necessary, however because a partnership is a closed
personal relationship of the parties that cannot be maintained against the will of any one of them.
 Investment withdrawal difficulty: a person who invests money in a partnership may have a hard
time withdrawing the investment. It is much easier to invest in a partnership than to withdraw. The
money typically considered a “frozen- investment” is tied up in the operation of the business. If a
partner wishes to sell his/her interest in a business, it may be difficult to do so. Even if a buyer is
found, the person may not be acceptable to the other partners.

2.1.3 Corporation:

A corporation is a legally defined type of business ownership in which the business is considered
a type of “person” (or “entity”) under the law, and limited liability is granted to the business
owner(s). It is an artificial person having no existence except in the eyes of the law. It is an
association of stockholders (part owners); formed with government consent and having the
power to transact business in the same manner as if were one person. A corporation has the same
rights as an individual to own property, conduct business, make contracts, sue, and be sued. The
ownership of a corporation is divided into transferable unit known as share or stock. The
certificate that the corporation issues when the investors contribute money or other assets in the
corporation is called stocks or shares certificate. The stock or share certificate is an evidence of
the investor’s ownership equity. Many stocks have a price assigned to them when they are

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issued. This price is called par value. Each shareholder owns part of the corporation, as
evidenced by stock certificates. These certificates give common shareholders the right:
 To elect the directors of the corporation.
 To cast one vote per share at shareholders’ meetings.
 To receive dividends in proportion to the number of common shares they hold.
 To sell their shares to anyone who wants to buy them unless the shareholders must offer
to sell them to the corporation first.
 To buy the new shares in proportion to the amount of stock they already own.

Characteristics of corporation
 Separate legal entity: when we define corporation we said that it is a single entity or
artificial person in the eyes of the law. This indicates that though it is not a natural person,
but has many of the rights of the natural person. Among them, to own and transfer
property, to sue and be sued in court, enter into contracts by its own name, to manage its
own name, to manage its own affairs, to borrow money. All the rights, duties and status of
a corporation system are from the charter of a country.
 Death and withdrawal of shareholders: Unlike the partnership, ownership in a
corporation is readily transferable. Exchange of shares of stock is all that is required to
convey an ownership interest to a different individual. In a large corporation, stock is being
exchange constantly without noticeable effect upon the corporations of the business.
 Limited liability of stockholders: The liabilities of stockholders are limited to the extent
that they have invested money in the corporation unlike the other forms of business
organization. The creditors cannot claim beyond the business property i.e., their personal
property is secured.
 Separation of ownership from management: The owners or shareholders of a
corporation have not fully involved in the management activity of their business
organization. That is, it is managed by the board of director which are selected by the
shareholders from the members or owners of that business.

Advantages of corporation:
 Limited liability: unlike other forms of organization a corporation has limited liability.
This means that, the creditors cannot claim more than the assets of the corporation for
unpaid debts.
 Variety of skills, abilities and ideas: Since corporations are usually large, there is division
of responsibility, which allows the company to hire specialists and professionals to run the
operation for shareholders. These people are all skilled in particular areas and can bring
about a level of managerial efficiency that would not be possible if one or two owners
attempted to carry out all these duties by themselves.

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  Easy transfer of ownership: when one stockholder wants to leave the corporation, he only
sells the stock. So when we relate with other forms of business organization it is relatively
easy task.
 Ease of expansion: a corporation has the ability of raising the tremendous amount of
capital needed for large manufacturing, transportation, finance, construction, and etc.,
enterprises. When more capital is needed, additional stock is sold to the public.
 Continuous existence: another feature of the corporation is its ability to survive
independent of any particular investors or managers. Even if the owner of a significant
number of stockholders die or wish to withdraw, his or her portion of ownership can
usually be easily sold on the market, and the business activities of the corporation continue
for long period of time.

Disadvantages of corporation:
High taxation: one of the greatest objections to corporation form of ownership for many
businesses is that corporations are taxed more heavily than a sole proprietorship or
partnership. Corporations pay taxes on profits, and stockholders pay taxes on the dividends
they received from those profits.
Relatively low credit standing: Creditors cannot claim more than the property of the
business so this discourages creditors to lend money. Thus, they cannot able to have
relation with many creditors.
Delay in decision making: Decision especially on key issues requiring general meeting of
shareholders may be delayed because of the time interval between meetings, difficulty of
getting the required number of members to pass decision or the requisite quorum(minimum
number required for valid meeting), and the presence of diverse interests which may lead to
disagreements.
Complexity and high cost of its establishment and operation: corporation requires large
sum of money, which a large number of people have to be approached for raising this
capital. Both state and federal governments tax corporations. It demands lawyer’s services
to draw up the charter and to handle the papers and reports that must be filed regularly by
the corporation.

Other forms of a business:

1. Cooperatives:

Cooperative is a group of small producers or consumers of goods and services that wish to band
together to achieve competitive advantage of large size in the market. According to ICA
(International Cooperatives Alliance) a cooperative is an autonomous association of persons
united voluntarily to meet their common economic, social and cultural needs and aspirations
through a jointly owned and democratically controlled enterprise.

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The Essential nature of cooperative
Cooperative is a universal form of organization: cooperation is a general form of organization
and it is applicable to consumers’ cooperatives, producers’ cooperatives, credit cooperatives,
farming cooperatives, industrial cooperatives, processing cooperatives and other type of
cooperatives.
The cooperative is an enterprise: it is engaged in a business activity- production, distribution,
supply, marketing or credit. It is not a charity. It is engaged in a business relevant to the common
economic needs of the members.
The cooperative is a service enterprise: the cooperative enterprise is not meant for earning profit
for its owners by doing business with others. It is rather intended to provide service to its
members by meeting their common needs as economically and effectively as possible.
Cooperative promotes the welfare of the community as whole: even though the surplus earned
by a cooperative arises out of over-charging members consequential to the policy of cost-plus
pricing and it is expected to be returned to the member-users in proportion of their investment, in
practice the major part of the surplus is used partly for creating reserve funds and partly for
creating common good fund. The reserve fund is not shared by the members at any time even
when the society is wound up. It is becomes the social wealth of the local community. The
common good fund is used for any good common purpose of the community.
A cooperative organization is owed and democratically controlled by member-users: in a
cooperative organization, the members and the users are the same. The member-users own the
organization and control it democratically. All members enjoy equal rights in exercising control,
irrespective of variations in the amount of share capital subscribed by them. This system
eliminates the opportunities for any member or small group to gain control over the cooperative
by virtue of his or their share holdings. That is controlled by capital is eliminated and control is
vested in members as human beings.

Classification of cooperatives
Cooperatives can be classified in to different categories based on the following point.

1. By groups serviced:- agricultural cooperatives, consumer cooperative, credit cooperative, health

care cooperatives, student cooperatives, etc.
2. By type of membership: - local cooperatives, unions, centralized, and national.
3. By geographic location:- local cooperatives, regional cooperatives, national cooperatives, and
international cooperatives.
4. Function:- producer cooperatives, purchasing cooperatives, service cooperatives, supplier’s
cooperatives, etc.
5. Legal status- registered cooperatives and unregistered cooperatives.

2. Joint venture

A joint venture is a strategic alliance where two or more parties, usually businesses, form a
partnership to share markets, intellectual property, assets, knowledge, and, of course, profits. It
is a business entity created by two or more parties, generally characterized by shared

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 ownership, shared returns and risks, and shared governance. Companies typically pursue joint
ventures for one of four reasons:

To access a new market, particularly emerging markets;

To gain scale efficiencies by combining assets and operations;
To share risk for major investments or projects; or
To access skills and capabilities.
Types of Joint Ventures:

#1 – Project-Based Joint Venture:

Under this type of Joint Venture, companies enter into a Joint Venture in order to achieve a
specific task which can be an execution of any specific project or a particular service to be
offered together, Assignment, etc. Such collaboration is usually undertaken between companies
for an exclusive and specific purpose only and as such ceases to exist once the particular project
is completed. In other words, these types of Joint Ventures are bound by time or a particular
project.

#2 – Functional Based Joint Venture:

Under this type of Joint Venture agreement, companies come together to achieve a mutual
benefit on account of synergy in terms of functional expertise in certain areas which together
enables them to perform more efficiently and effectively. The rationale companies focus on
before entering such Joint Venture is whether the likelihood of performing better is more
together than doing it separately and more effectively.

For example: Let Company A specializes in formulation business and has various patents
trademarked under its name but due to lack of funding company is unable to put such
formulation of commercial usage. On the contrary Company B is a cash-rich Pharma company
that lacks in-house patents but holds experience in commercial success and also has adequate
funding capacity. Together these two companies can mutually benefit and can complement each
other by entering into a Functional Based Joint Venture.

#3 – Vertical Joint Venture:

Under this type of Joint Venture, transactions take place between buyers and suppliers. It is
usually preferred when bilateral trading is not beneficial or economically viable. Normally in
such Joint Ventures, maximum gain is captured by suppliers while limited gains are achieved by
buyers. Usually, Vertical Joint Ventures enjoy a higher success rate and also deepen the
relationship between the Buyers and Suppliers which ultimately help benefit the businesses in
offering quality products and services to customers at reasonable prices.

#4 – Horizontal Joint Venture:

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Under this type of Joint Venture, the transaction happens between companies that are in the same
general line of business and that may use the products from Joint venture to sell to their own
customers or to create an output that can be sold to the same group of customers. These types of
Joint Ventures suffer from opportunistic behavior between the partners due to being in the same
general line of business. Under such types of Joint Ventures, the gains are equally shared by both
parties.

3. Franchises:

Franchising is a system used by a company (franchisor) that grants others (franchisees) the right
and license to market a product or service under the franchisor’s trade names, trademarks,
service marks, know-how and method of doing business. It is a system for distributing products
or services through independent resellers. It is a format of mutual dependence which allows both
the franchisor and the franchisee realize profits and benefits.

It is where a person (franchisor) who has developed a certain way of doing a business gives
another (franchisee) the right to use that business model in exchange for a fee.

Types of Franchises:

There are two main types of franchises: product distribution and business format.

Product distribution franchises: simply sell the franchisor’s products and are supplier-dealer
relationships. In product distribution franchising, the franchisor licenses its trademark and logo
to the franchisees but typically does not provide them with an entire system for running their
business. The industries where you most often find this type of franchising are soft drink
distributors, automobile dealers and gas stations. e.g., Pepsi, coca cola … etc.,

Although product distribution franchising represents the largest percentage of total retail sales,
most franchises available today are business format opportunities.

Business format franchises; on the other hand, not only use a franchisor’s product, service and
trademark, but also the complete method to conduct the business itself, such as the marketing
plan and operations manuals. Business format franchises are the most common type of franchise.

Most popular franchising opportunities are in these industries: fast food, retail, service,
restaurants, lodges, etc,

2.2 Strategic decision-making Process of Entrepreneurial Venture

A strategic decision refers to the goal-directed cognitive process where the importance of
planned actions or nonprogrammable decisions in uncertain and complex environments, affect
the health and survival of an organization where the future is unpredictable. Furthermore,

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strategic decision-making (SDM) involves the commitment of substantial organizational
resources in order to accomplish organizational goals.

This process of SDM usually starts with a vague idea about what a possible solution for a
problem can be. Such a solution is mainly characterized by entrepreneurs’ innovativeness, due to
its novelty, open-endedness and complexity.

Organizations performance is associated with the making of successful strategic decisions. There
are some rules to categorize a decision as being strategic. According to Harrison & Pelletier, 2001,
a decision is a strategic decision when:

1. The decision is directed toward defining the organizations relationship to its external
environment,
2. The decision encompasses the entire organization,
3. The decision depends on input from all of the primary functional areas in the organization,
4. The decision has a direct influence on all of the administrative and operational activities
throughout the organization, and
5. The decision is vitally important for the long-term well-being of the total organization.
A Strategic decision is successful when the strategic decision does what it was intended to do, within the
given constraints

2.2.2 Basic Business Idea

The ideas that provide value for the customer, profit for the entrepreneur and benefit for society
and can be transformed into products of services are called business ideas. Business ideas that
will sustain all the customer, society and entrepreneur have the ability to meet a lot of
requirements, and solve problems.
A business idea is the first step and the beginning of a business. A business idea is people-
oriented. People have various needs and problems. As people solve their problems, meet their
needs, their lives get easier. The needs that are not met and unsolved problems make people's
lives difficult. Making people's lives easier presents certain prosperity level. Thus, it is necessary
to perceive and understand these problems in order to find business ideas
and grab opportunities and change these opportunities to business ideas.

A business idea is a short and precise description of the basic operation of an intended business.
Before you start a business, you need to have a clear idea of the sort of business you want to run.
Your business idea will tell you:

 Which need will your business fulfill for the customers?

 What kind of customers will you attract?
 What good or service will your business sell?
 Who will your business sell to?

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  How is your business going to sell its goods or services?
 How much will your business depend upon and impact the environment? That is, a good
business idea will be compatible with the sustainable use of natural resources and will
respect the social and natural environment on which it depends.

Cases: Lily and Maya’s business ideas

Lily produced sunflower oil without knowing: Since Maya did her market research, she knows that

 Is there a need for oil?  Pre-teens and teenage girls in her area have
 Who needs it? limited choice and access to clothing
 Why do they need sunflower oil and not another specifically designed for their age group.
type of cooking oil?  What they wear is either designed for younger
She, therefore, had no idea how big the demand for children or for adults. Maya aims to fill the
sunflower oil would be. Consequently, she could not need by producing fashionable clothes that are
find customers as the need had been fulfilled by the suitable for their age group.
time she was able to supply her good.

The benefit provided from produced goods and services is both for the customer and the
entrepreneur. What an entrepreneur needs is to make profit. So, a business idea should provide
these three criteria:

1. It should provide benefit to the customer.

2. It should bring competitive advantage for the entrepreneur.
3. It should bring gain to the entrepreneur and his shareholders.

2.2.3 Scanning Internal and External Environment (SWOT Analysis)

An Environmental Scanning is the identification and monitoring of factors from both inside and
outside the organization that may impact the long-term viability of the organization.

A SWOT analysis is a quick way of examining an organization’s processes by reviewing its

(internal) strengths and weaknesses and matching these to its (external) opportunities and threats.
Compiling this information together into one place enables you to identify all major factors
affecting your organization’s operations, and act as a decision-making aid to formulate an
effective response strategy. Each organization will have its own specific SWOT profile. This
process needs to be repeated frequently to reflect the ever-changing internal and external
relationships.

SWOT analysis is an effective method for identifying Strengths and Weaknesses, and examining
the Opportunities and Threats facing the organization. Often carrying out an analysis using the
SWOT framework reveals changes that can be useful.

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Carrying out a SWOT analysis responds the following questions.

Strengths:
 What are your advantages?
 What processes are working well?

Weaknesses:
 What could be improved?
 What was done poorly?
 What should be avoided?
 What didn’t work?
This should be considered from an internal and external basis – do other people perceive
weaknesses that you don’t see? It is best to be realistic now, and face any unpleasant truths as
soon as possible.

Opportunities:
 What did you learn in order to be more effective in the future?
 Are there ways to capitalize on your strengths?
 What would you or can you do differently in the future?

Useful opportunities can come from such things as:

 Changes in technology and markets on both a broad and narrow scale

 Changes in government policy related to your field
 Changes in social patterns, population profiles, lifestyle changes, etc.

Threats:
What are the barriers in responding to an event more efficiently in the next time?

 What obstacles do you face?

 Has your role or responsibility changed as a result of the event/incident?
 What are the things that need to be done in preparation for the next time?

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Carrying out this analysis will often be enlightening – both in terms of pointing out what needs
to be done, and in putting problems into perspective.
Sample SWOT Matrixes: Local Coffee House SWOT Analysis
Strengths (internal) Weaknesses (internal)

 Very profitable  Employees are high school and college students

 Strong ethical values and mission statement who have to work around schedules
 Enthusiastic employees  Offer only coffee and drink menu at this time
 Solid customer base  Manager/supervisor nearing retirement age
 Open year round to take advantage of tourist and
local resident business
Opportunities (external) Threats (external)

 Newly renovated space allows for expansion of  Gas prices increase costs of delivery of goods
services to include lunch and breakfast service from down south
 No other coffee shop offers coffee delivery service  Anticipated increase in costs of milk, coffee, and
 Contract for coffee stands near the cruise ships has paper products
become available  Increased competition from newly opened tea
parlor
 Lack of applicants for open positions
 Slow growth in high school and college age
population

2.3 Deciding on Development Approach

A set of questions that an entrepreneur must address when organizing a business is whether to buy an
existing business, start a new one, or seek a franchising agreement.

2.3.1 Buying Existing Business

Buying an existing business offers a strong set of advantages. Because the entrepreneur can
examine the business’ historical records to determine the pattern of revenue and profit and the
type of cash flow, much guesswork about what to expect is eliminated. The entrepreneur also
acquires existing supplier, distributor, and customer networks. On the negative side, the
entrepreneur inherits whatever problems the business may already have and may be forced to
accept contractual agreements.

2.3.2 Startup a new Venture

Starting a new business from scratch allows the owner avoid the shortcomings of an existing
business and to put his or her personal stamp on the enterprise. The entrepreneur also has the
opportunity to choose suppliers, bankers, lawyers, and employees without worrying about
existing agreements or contractual agreements. More uncertainty is involved in starting a new
business, however, than in taking over an existing one. The entrepreneur starts out with less
information about projected revenues and cash flow, has to build a customer base from zero, and

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may be forced to accept unfavorable credit terms from suppliers. Because it is an unknown
quantity, a new business may have difficulty in borrowing money.

2.3.3 Franchising

An alternative to buying an existing business or starting one from scratch is entering into a
franchising agreement. Many small-business owners find entry into the business world through
franchising. A license to sell another’s products or to use another’s name in business, or both, is
a franchise. The entrepreneur pays a parent company (the franchiser) a flat fee or a share of the
income from the business. In return, the entrepreneur (the franchisee) is allowed to use the
company’s trademarks, products, formulas, and business plan. Industries within which
franchising is common include fast foods, specialty retail clothing stores, and local automobile
dealerships.
Definition: Franchising is an arrangement where one party (the franchiser) grants another party (the franchisee) the
right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a
good or service according to certain specifications.

Franchising may reduce the entrepreneur’s financial risk because many parent companies
provide advice and assistance. They also provide proven production, sales, and marketing
methods; training; financial support; and an established identity and image. Some franchisers
also allow successful individual franchisees to grow by opening multiple outlets.

On the negative side, franchises may cost a lot of money. Also, the parent company often
restricts the franchisee to certain type of products. Some franchise agreements are difficult to
terminate. Despite the drawbacks, franchising is growing by leaps and bounds. Presently, well
more than one-third of U.S. retail sales go through franchisees, and that figure is expected to
climb to one-half very soon. Much of the attraction of franchising is that this approach to starting
a new business involves limited risks. At the same time, however, also remember that no form of
business is completely risk-free.

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