Quiz 5: Franchising


Introduction of the case - Extreme garage makeover: Mr. MS advertised in the Wall Street magazine in order to expand his garage business. Many individuals joined his business as franchisees. They invested $200,000 and $250,000 with an authorization fee of $50,000 and pay 6 percent of gross sales as royalty. Mr. S had given basic training for the franchisees for three days and he believes that if there are strong sales and marketing background and money, the business will be profitable. Initially, the business went smoothly for two years. In 2003, he found fifteen companies struggling; in order to keep them on track, he registered in the consulting firm "I franchise group" , after the training. For three quarters, the position was good but 25 percent of the franchises were still struggling. So, Mr. MS decided to close the struggling franchises. The franchise agreement clearly stated that the franchisor could shut down the franchises that have not met specific goals. The troubles may occur to MS if he closes the failing franchises: Lawsuits: Mr. MS may face cheating cases with high penalty, and may be arrested, and may have to close his business. Reputation and public image: The company reputation and public image will come down and incur huge losses. This will impact other franchises which are functioning well.

Franchise agreement: A franchise agreement is defined as a written file which shows the privileges and responsibilities of both the parties in a franchise. This agreement explains the exact and complete terms of the officially authorized connection between the franchise and franchisor. Statement: "Franchise agreement is simpler than partnership." Justification: Partnership is defined as an association of two or more members who operate a business. Each partner has the equal responsibility towards the debts of the business. The profit or debts can be shared as per the ratio of their investment. The franchise might be considered as a partnership when the franchise and franchisors make an agreement to share the revenue and losses as per the prewritten agreement. Through this, both the partners can claim a stake and exercise decision making powers. Franchises and partnerships have a common outline to operate business with one or more individuals. The franchise agreement gives the complete description of authorization fees and royalties to be paid to the franchisor, gives the complete picture of terms and conditions, roles and responsibilities of the franchise, and indicates the decision making powers. The partnership agreement also specifies the roles and responsibilities, stakes, and decision making powers according to the money invested. Thus, franchise agreements and partnership agreements are unique. The predetermined terms and conditions specify that they would start the business with another individual based on the business complexity.

Franchise: A franchise is defined as an opportunity given to offer specific products and services under unambiguous terms and conditions at a definite locality for a declared period of time. It is a contractual authorization to function an individually owned business as part of the company. Franchisee A franchisee is defined as a small business or trade that pays fees and percentage for privileges to the local supply of the product or services. A franchisee is an independent businessman who agrees to operate under the terms conditions setup by the franchisor. Franchisor: A franchisor is a mother company owning the exclusive rights to grant license to prospective franchisees. It is processed through the franchise agreement.