To what extent do you agree with the view that franchising is the salvation of people starting and operating a small business

Essay 2005 20 Pages

Business economics - Company formation, Business Plans


Table of Contents

1 Introduction

2 Defining ‘Franchising’ and ‘Small Business’

3 Small Business Failure, Entrepreneurship and the Notion of ‘Salvation’

4 Independent Small Business versus Franchise Business

5 Conclusion

List of References

1 Introduction

Franchising as a way of starting or operating a small business that is more likely to be successful than engaging in an independent1 small business. This was the predominant opinion during the last decades (Hoy, 1994). The common view towards franchising merits a closer look into situations franchising and non-franchising small businesses could face to finally answer the titlequestion of this essay "To what extend do you (do I) agree with the view that Franchising is the salvation of people starting and operating a small business?".

To provide a sound answer the initial question requires some clarification. The basic notions of 'franchising' and 'small business' are defined and described in the first chapter. The second chapter, however, focuses on the person who starts or runs the small business, the entrepreneur or small business owner. The understanding of the entrepreneur's personality shall be enhanced by asking several questions. What kinds of decisions do self-employed people have to make, what are the threats they are confronted with and what determinates their failure and success? What might be the reasons for entrepreneurial behaviour and how might small business people feel running or starting the business? Moreover, what could the term 'salvation' mean to these people, and how could 'salvation' be interpreted?

The third part of this essay combines the insights of the previous chapters by displaying the framing conditions that could induce the future small business person to start a franchise as firsttime self-employment or the existing entrepreneur to give up an existing independent business in order to run a franchise. Whether franchising finally meets 'salvation', what kind of advantages and disadvantages franchising might offer and what kind of personal attributes franchisees and franchisors need to embody shall be presented in this last chapter.

My subjective evaluations will be clearly visible in the text, for instance by defining 'salvation' or assessing the personal feelings of the prospective or current self-employed person. Additionally the text concludes with my individual judgement about the 'extent' to which franchising is the salvation of people starting or operating in a small business.

2 Defining ‘Franchising’ and ‘Small Business’

To answer the above mentioned essay-question properly, the concepts employed need to be understood beforehand. So, what is franchising?

One very intuitive definition comes from Kishel & Kishel (1998, p. 216). For him Franchising is a method of doing business whereby a company (the franchisor) grants to others (the franchisees) the rights to produce, sell, distribute, or market the company's products or services. In so doing, franchisees are permitted to use the franchisor's name, trademarks, reputation, procedures, and selling techniques. To obtain these rights, each franchisee agrees to pay the franchisor a sum of money (the franchise fee), a percentage of annual gross sales, or both.

However the extensive notion of franchising as "a method of doing business", which is used here, can be seen from different points of view. Megginson, Byrd & Megginson (1997, p. 141) and Vaughn (1979, p. 12, cited in Stanworth & Curran, 2003, p. 23) define franchising as a "marketing system" and "a form of marketing or distribution" whereas others find "method of raising capital" (Ayling, 1987, cited in Withane, 1991, p. 23) more accurate. For many others franchising is predominantly a contractual relationship which is based on the franchise agreement (Hing, 1995; Rubin, 1978, cited in Stanworth & Curran, 2003; Ozanne & Hunt, 1971, cited in Stanworth & Curran, 2003; Bain, 1987, cited in Withane, 1991). The franchise agreement delineates the obligations and rights of both parties, for instance the total franchise costs2, the contract length, the franchise territory, procedures or management training and assistance, etc. (Kishel & Kishel, 1998). The contract is also a means for the franchisor to exercise control. The control is little and concentrates on "maintaining the integrity of the product" (Megginson, Byrd & Megginson, 1997 , p. 143) in product and trademark franchising and is held relatively tightly for business format franchising.3

Franchising relies on the possibility to copy a successful, market-tested product or business concept, which requires that the business concept or product is standardiseable to a far extent. Standardised products are most likely to find in the retail sector where unsurprisingly most of the franchise businesses are located, i.e. restaurants, convenience stores, gasoline stations, motels and hotels, building supplies stores, and so on.4

The second important term of the initial question, small business, frames or limits the range of this essay. Franchising, as it is considered here, is based on the underlying assumptions about a small business. Despite seeming apparent, these assumptions need to be rediscovered and connected to franchising.

One of the main characteristics of a small business is the involvement of its founder or owner in its daily operations. Hamilton and English (1990) distinguish between the owner-operator, the owner-manager and the owner-director.5 None of these businesses types exceeds fifty employees. Another quality of a small business is the imbalance of existing business-related knowledge and experience of the owner-operator or owner-manager to perform all tasks that the business will impose. Morris (2001) outlines four types of people who start their own business: the ‘technical specialist’ or craftsperson, the ‘experienced manager’, the ‘salesperson’ and the ‘administrator’. Characteristics of all four types are necessary to run a business successfully. In terms of functions that the firm needs to perform, the entire value chain, starting with research & development, purchasing primary products, production, marketing, sales and post-purchase service needs to be completed, flanked by just as important longitudinal-section functions like logistics, controlling & finance, human resources. Obviously none of the above mentioned entrepreneur-types or small business owner can fill all functions (Wilshire Committee (Chairman: Wilshire, 1971, cited in Everett & Watson, 1998). An additional necessary quality of a being self-employed in a small business is independence or a close connection between the owner's independent decision making and the fate of his or her business.

The franchise business consist of two legally separate companies or contract partners (Stanworth & Curran, 2003) whereas the individual independence of either the franchisor from its franchisees or the other way round a matter of interpretation. The predominant difference in comparison to the independent small business is certainly the continuing relation between franchisor and franchisee, which gives franchising a note of a partnership business rather than an independent business. In terms of size, most franchisee companies and franchisors operate within the stated frame of a small business (Stanworth & Curran, 2003). Regarding the abilities which the owner-manager must embody, franchising indeed could relieve the franchisee of some knowledge-based burdens. According to the chosen franchising type, whole functions could be filled by the pre-developed franchise concept: promotion and pricing, advertising, place and product-choice, supply, bookkeeping and debt collecting. Moreover, the franchisor might offer consultancy for the rest of the existing value-chain functions. The small business franchisor also 'outsources' all or parts of its distribution system, human resource management and possibly innovation management to its franchisees.

3 Small Business Failure, Entrepreneurship and the Notion of ‘Salvation’

'Salvation' refers to the overcoming an uncomfortable situation, a burden, a threat on the business owner's economic existence or simply a failure. But this 'salvation' could be interpreted differently according to the subjective expectations and experiences of the prospective or current entrepreneur. Hence the nature of the entrepreneur and the specific traits which create a entrepreneurial personality will be traced before common small business failure risks are named, followed by several interpretations of 'salvation'.

To an economist, an entrepreneur is one who brings resources, labour, materials, and other assets into combinations that make their value greater than before, and also one who introduces changes, innovations, and a new order. To a psychologist, such a person is typically driven by certain forces - the need to obtain or attain something, to experiment, to accomplish, or perhaps to escape the authority of others (Vesper, 1980, p. 2, cited in Hisrich, 2002, p. 10).

Hisrich and Peters (2002, p. 10) continue to characterize entrepreneurship as a creative process where "something new with value" is produced by devoting "the necessary time and effort", as initiative and risk taking by "assuming the accompanying financial, psychic and social risks", and as creating wealth through expecting monetary rewards and "personal satisfaction and independence". To create 'something new of value' certain prerequisites need to met. First there is the issue of prior knowledge and experience. Hisrich and Peters (2002) mention that prior working experience in technology research and development would be a basis for would-be entrepreneurs to develop their own product ideas or process innovations as well as marketers already know the customers' needs, the distributions channels and the sales pitch.6 Other factors to sustain an entrepreneur are emotional stability, a high level of frustration tolerance and the willingness to work hard as well as physical fitness. Moreover, operating his own business will certainly put strains not only on the entrepreneur but also on his relationship to family members and friends (Morris, 2001).7 On the other hand the expected rewards are highly motivating: independence8, being one's own boss, recognizing an opportunity and realising it before anyone else it does, creating a satisfying job environment9, achieving success and a reputable social status and making profits. In this regard, entrepreneurs are 'do-it-alone' people. They must want to be an entrepreneur, and they need to have a strong "locus of control", a "need for achievement", a "need for independence" and be "risk taking" (Hisrich, 2002, p. 66-68). Being an entrepreneur is a balancing act: failure is omnipresent, success is uncertain, and work is highly demanding.

Small business failure risks can be distinguished in internal, firm-based risk and external economy-based risk. While the latter are comprised of general economic uncertainty, high interest rates, inflation, recession, customer's and supplier's bankruptcy, unemployment, lack of infrastructure, and decrease of aggregate consumer demand, and therefore effect all businesses (Hisrich, 2002; Everett & Watson, 1998), the former might prevail significant differences between independent small businesses and franchises.


1 'Independent' business means here and for the remainder of this work a small business that is not only legally independent but also not associated with the franchise business.

2 The costs for the franchisee usually consist of initial fees to be allowed to operate a franchise, the investment costs to establish a site to sell the product and to equip the location with supplies and necessary inventory and the royalty payments, the percentage of annual gross sales that need to be paid to the franchisor (Kishel & Kishel, 1998).

3 "Product and trademark franchising is an arrangement under which the franchisee is granted the right to sell a widely recognized product or brand [...] Business format franchising is a relationship in which the franchisee is granted the right to use an entire marketing system, along with ongoing assistance and guidance from the franchiser" (Megginson, Byrd & Megginson, 1997 , p.143). The latter includes a wide range of services provided by the franchisor, i.e. bookkeeping, operating systems, marketing, selection of sites and plans for building including inventory, for the price of higher fees than the former.

4 For reasons of comparison the first definition could be confronted with and enhanced by another, more academic, definition which also shall be the basic definition this text is based on: Stanworth and Curran (1983 p.11, cited in Stanworth & Curran, 2003, p. 24) made the proposal to define franchising as: "A business form essentially consisting of an organization (the franchisor) with a market-tested business package centered on a product or service, entering into a continuing contractual relationship with franchisees, typically self-financed and independently owner-managed small firms, operating under the franchisors trade name to produce and/or market goods or services according to a format specified by the franchisor."

5 The owner-operator is actively engaged in carrying out the purpose of the firm, the owner-manager is mainly occupied with coordinating and controlling the business operations, and the owner-director, who can be seen as the head of the company, directs a team of managers and the company's affairs (1990).

6 This is congruent to two characters, the salesperson and the technical specialist, of the four-types-of-people-who- start-a-business scheme, drawn up by Morris (2001).

7 The general shortage of time and money and its likely effects might just be two examples.

8 As was mentioned before in chapter 1 'independence' is also the main quality of a small business and creates a connection between the owner an his or her firm.

9 This might be especially relevant if the prior work as an employee was a frustrating experience and did not offer a positive work environment.


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University of Otago – Department of Management
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Title: To what extent do you agree with the view that franchising is the salvation of people starting and operating a small business