Impact of Franchising a Business - Research Paper Example

?Economic Outcome Analysis Economic Outcome Analysis Andy's Parties may benefit a lot from franchise; however, there are numerous factors that must be considered to determine whether it should franchise the business of or not. Notably, franchising a business is usually a means of faster growth, but it is never a ticket to success of franchisors especially in a challenging economy (Mhlaba, 2004). Moreover, franchising is not automatically a means of new and numerous buyers. Therefore, before deciding on whether to franchise or not, it is worth to consider numerous business models and concepts that would help in evaluating the viability of franchising ideas. The same concepts and models are going to be applied to Andy's Parties business to determine whether it would be viable for it to be franchised. The first fundamental step is to evaluate the business. This step would be help in determining the sale and the profitability of a business. If the sales of a business are decimal, it would be difficult to franchise such a business since the sales reflect the standing of the business in the market. Less profitable businesses are businesses that are likely to have fewer customers and their products and services are not well known to the targeted customers. Andy's Parties’ annual financial record shows that it does not do well in terms of selling its services to its customers. For the whole year it organized an average 650 parties for the whole year (Spinelli, Rosenberg, and Birley, 2004). This translates to nearly one to a maximum of two parties a day at an average cost of $385 per event. These are low sales for the Andy's Parties to consider franchising its services. In other words, Andy's Parties services and may be products are not known vastly among its targeted customers; therefore, it would be difficult or quite a challenge for the franchisees to do well in selling Andy's Parties services. Hence, it would be advisable that Andy's Parties to open more branches so that it increasing its customer and to create a solid name. Return on Investment (ROI) is another concept that Andy's Parties can be used to determine whether it can franchise or not. Notably, if a business is not enjoying a strong and proven economic model, there is no point for such business to franchise its services. In this case, the franchisors are usually expecting 15% ROI where if the initial investment for the franchising business is $200,000, the franchisee is expected to look for a minimum of $30,000 as the annual profits of the business. Moreover, the business needs to pay for royalties. The Andy’s Parties annual operation cost is $470,000, thirty percent of this amount is $141,000. This means that when it franchises the business, the franchisee will be expected to have a return of $141,000 at the end of the third year (Spinelli, Rosenberg, and Birley, 2004). From the Andy's Parties annual report, it can only manage $80,000 before tax. This means that its expectation of its franchisees will be more that what it makes by itself. Notably, the franchisees must also pay loyalties above the amount they are required to return into the Andy's Parties investments (Mhlaba, 2004). With this large figures reality, franchising Andy's Parties services will be a burden to Andy's Parties and franchisee since the reality of profit making will never come by within the expected period. Additionally, the Andy's Parties has not provided its business structure that would help the franchisee to determine their relationship with the franchisor. It is usually vital to couple ROI which is a single unit with other successful base model to warrant franchising. In most cases, it is usually difficult to replicate the success and effectiveness of a single unit especially where the owner of the business is passionate and quite hand on with the business (Hayes, 2005). In this case, it is vital for the business intending to franchise its services to try its business concepts in at least three locations. Therefore, since Andy's Parties has not tried its new business ideas in different locations, it would vital that it opens the same business in different locations. This calls for them to expand the business by opening other branches as opposed to franchising the business (Mhlaba, 2004). Notably, this move will help in showing that Andy's Parties can be successful in different markets with different customers and demographics. Therefore, it would be advisable for Andy's Parties to expand its market as a single business entity to different parts of the country as well as nationally. After determining that its services can do well in all these markets, it can now think of franchising. Andy's Parties also needs a strong operative system. This will ensure that Andy's Parties has consistency in offering and managing its operations. Strong operational systems are a fundamental requirement to successful operation. Moreover, it will help Andy's Parties to understand and interact with its franchisees effectively and conveniently (Hayes, 2005). Notably, from the case provided for Andy's Parties, it is apparent that Andy's Parties has no strong operational system that can influence franchisees effectively and allow free flow of information between Andy's Parties and its franchisee (Mhlaba, 2004). Therefore, before Andy's Parties could consider franchising its business, it must initiate and implement strong operative systems. Some of the operative systems that Andy's Parties must put in place include finances, operations, purchasing, marketing, and everything its business requires. Andy's Parties requires effective access to capital when it intend to franchise, this information is never provided for in their case analysis. Therefore, until they understand on how they will provide the business with the same, it will remain challenging for it to franchise the business. Notably, franchising usually requires less capital; however, it requires adequate capital to initiate and manage. Franchising usually attract significant legal fees right from its creation where it requires disclosure documents to find a potential franchisee (Hayes, 2005). Additionally, the marketing budge will be elongated than the normal operative marketing budget. The franchise will need support staff to help in franchising business. Notably, Andy's Parties has no such marketing systems and employment plans. Therefore, Andy's Parties needs appropriate access to more capital to help it in initiating and running the franchise business (Spinelli, Rosenberg, and Birley, 2004). The only sure ways that lies in its ways current as means of accessing more capital for future franchise, is to expand its business to attract more customers. In additional, expanding to other region will help it determine what areas of its operations require adjustment. Finally, it is worth noting that franchising requires commitments to long term business relationships particularly with the franchisees. Effective and committed implementation of operative systems is one of the ways that Andy's Parties may determine its current situation on how it relates with other business ventures. Franchising usually attracts up to 10 years of business relationships; therefore, Andy's Parties must be ready for such long term relationships. In addition, Andy's Parties should work on its leadership systems and must be sure that it can handle pressure from different franchisees (Hayes, 2005). Therefore, before Andy's Parties franchises its business, it must initiate effective and elaborate leadership structure. This can be achieved through laying out a structured business operation and management system (Spinelli, Rosenberg, and Birley, 2004). Moreover, opening other branches nationally and internationally will help in making such operation and management systems effective due to numerous challenges that will emanate from the operation of such branches. Franchising business requires numerous concepts and understanding the vast business models related to the same. Therefore, before Andy's Parties thinks and decides on franchising, it must first understand its current business situations and challenges. Finally, working on the same challenges and understanding each situation will provide it with a platform for successful franchise. However, Andy's Parties current business situation only calls for opening other branches as means of expanding the business. References Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Andy's Parties. Case Analysis. Hayes, R. (2005). The franchise handbook: A complete guide to all aspects of buying, selling or investing in a franchise. Ocala, Fla: Atlantic Pub. Group. Mhlaba, S. L. (2004). Incentive based franchise (IBF): A new model for world governance. Coral Springs, FL: Llumina Press. Spinelli, S., Rosenberg, R., & Birley, S. (2004). Franchising: Pathway to wealth creation. London: FT Prentice Hall. Bottom of Form Read More