Franchise Business and Non-franchise Business - Case Study Example

Franchise Business and Non-franchise Business A franchise is an arrangement in which the owner of a trademark, trade name or a copyright allows others to use the trade mark, trade name and copyright in the selling of goods and services by way of a license. A non-franchise business on the other hand, is a solo variety type of business, which has up-front costs involved during initiation. Franchise businesses require a greater amount of financial input as well as personnel in order to manage the business (Crawford and ODonnell 20). The franchise business presented in this paper is a real estate brokerage firm by the name Block Real Estate Block Real Estate Brokerage firm interviewed obtains its materials and supplies exclusively from the franchisor. One of the company’s managing directors interviewed asserted that due to the gap created by the ever growing demand for houses in the urban areas contributed to the development of the company specializing in real estate. Since different people have different tastes in terms of houses within which they would like to live, customer satisfaction is guaranteed by providing information on all types of houses to enable quick decision making. The working population formed the majority of urban dwellers who needed quality housing facilities and this was the rational for starting Block real estate brokerage firm (Cross and Miller 56). What started as Block Consultancy in real estate eventually turned into a full-fledged firm. The quick pace of developments was attributed to the vision and objectives set by the parent organization. Initially the organization only depended on a single individual to manage meetings with customers, persuading them to accept their housing brokerage services. With the ever increasing population the demand for housing facilities also increased leading to an increased customer base. This caused further expansion of its business operations incorporating technological advancements like the internet, phones and fax machines in order to effectively manage the business. The firm’s structure and size increased in order to meet the new demands. The benefits of a franchise type of business are that; (1) it requires less capital to begin than other businesses as it allows the company to grow capital invested by the individual franchise; (2) It also allows multiple units to be opened at the same time which are supported by the parent organization in terms of advertisements and other promotional activities; (3) such a business has a greater market because of the availability of the availability of the business units in different parts of the market, bringing the business close to the customers while at the same time increasing competitiveness; (4) there are increased chances of a developed employee morale because of the fact that they are working with a large organization not an individual as they feel that their jobs are secure and that the parent organization ensures given standards are met in the operations; and lastly (5) the franchise business has a greater purchasing power because of the volume discounts that are offered resulting in higher operating margins (Crawford and ODonnell 22). At the start, many banks shied away from advancing the loan required to start the business. This was because of the absence of collateral that was needed in getting the loan. As the business continued to show prospects of growth, venture capitalists came on board and this helped in providing capital that boosted initial operations. The investments were made by the venture capitalists due to the risky nature of the business and this kept the company afloat until there was a break-even point (Crawford and ODonnell 27). The company ownership shifted from the few executive to the inclusion some of the capitalists on board. Profits were shared in the company reducing individual risks and the overall risks as well and this helped the firm to venture deeply into the real estate market. As is the case with many franchises, the franchisee ordinarily pays an initial fee for the franchise license. This fee is separate from the various products that the franchisee purchases from the franchisor. In most instances the franchisor receives a given amount of the overall sales volume as agreed in the contract. The franchisees may be obliged to contribute a certain percentage of their gross sales to an advertising fund administered by the franchisor enabling the franchisor to expand their franchise network. This is the case with Block real estate brokerage firm. The franchisor determines the territory to be served by the Block real estate brokerage firm. This is due to the number of franchisees also operating within the same market. It is thus given the exclusive rights to operate in a given geographic area. The presence of an agreement is bound to resolve any issues related to conflicts arising from breaching of contracts. The real estate firm ensures a proper representation on the legal front, by hiring its legal representatives to be present during the contract signing as it must be in good faith and fair to both parties. According to Cross and Mille, they argue that as part of the franchise agreement, the franchisor may require that the business upholds a certain organizational framework and capital structure. A given set of standards of operations are paramount to increase sales quotas, quality and record keeping. The franchisor may retain the stringent control over training of personnel and administrative aspects of the business. To ensure quality of service delivery the day to day running of the franchise business is left to the franchisee. However, a certain degree of supervision and control is reserved for the franchisor in order to maintain the company’s name and reputation. Periodic inspection is done to ensure that minimum standards are met as the franchisor has the legitimate interest in the quality of services. A franchisor can suggest the retail prices of services but cannot mandate them (Cross and Miller 57). Some of the expensive costs accrued include the employee compensation, income sources like commissions and residential management fees stabilized the firm because they continued in both good and harsh economic times. Some of the fixed expenses in the real estate business can impart either positively or negatively to the business depending on the number of years they have been in the business (Crawford and ODonnell 30). Though some of the costs are variable like commissions, advertising, and listing services the firm generated revenue from many sources. Block real estate firm took a long time to establish because of the many high initial costs involved in setting up the business. The initial start-up costs included the attorney and accountancy fees, cost for office set up and occupancy, promotional material, signs and lock boxes whose prices increase as the security technology is enhanced (Crawford and ODonnell 32). The startup budget covered at least three months of operation after initiating the business. Good management is enforced by following company ethics. However, the process of recruitment is also properly managed in order to come up with people who can work effectively in teams and who can work well in given positions in order to boost the company’s operations. Skills and position matching are done in order to ensure effectiveness. During the recruitment and selection process the company ensures it has honest people with a desire to scale the heights, something that is good for any company within the real estate industry (Crawford and ODonnell 37). Skill and knowledge development is ensured as the sales personnel also continue to pursue professional knowledge in marketing, financing, construction and law to be abreast with dynamics associated with the brokerage business. Real estate business requires one to have expert knowledge in real estate services (Crawford and ODonnell 40). Competition is stiff in the brokerage business especially in real estate as customers require them to deliver quality services and thus they must poses proper knowledge and skills. Incentives are offered to the sales people in order to boost employee morale. The franchisor strategy facilitates franchisee selection and plays a predominant role as an incentive strengthening mechanism to expand the business ideas (Maria 190). The business plan enabled the firm to know what to purchase and how it is going to be purchased. A business plan is developed in every phase of operation whether the firm will be part of a national franchise or will be independent. The business plan sets out the number of associates to be recruited which is in tandem with the budget requirements (Cross and Miller 59). The non-franchise business interviewed was a business unit that provided hair dressing services. The business was located in a neighborhood that was densely populated. According to the owner of Harlem hairdressing, other such services were only accessible if the residents moved out of the neighborhood. It was here that the idea of bringing services close to the people was born. It started as a family business which was to cater for the aesthetic value of clients by providing hair dressing services, products and treatments. It later grew drastically due to the increased customer demand of hairdressing services for an up to date look. Funding of the business was through savings made by the members of the family. Also the loans acquired from banks helped in pooling the financial resources to begin the business. Due to the high cost of beauty products, the business incurred extra costs when carrying out purchases leading to an increase in prices. The time taken before realizing profits was just two months. As soon as the business was established, profits began to trickle in due to the low cost of investments made. The major problem during the early years of establishing the business was overcoming customer fears on the quality of service being offered (Goldsbro 11). Proper managerial skills and experience injected into the business led to the growth and expansion of the business. Employees were effective team members as they knew their responsibilities. Customer service was highly essential and employees were willing, and politely responded to requests made by the clients (Goldsbro 13). The business manager has ensured that non-verbal cues are recognized when delivering hair dressing services. Also the clients are helped to reach their buying decisions (Goldsbro 15). Fierce competition and the rise of professional home-care products have affected the retailing price causing reduction in income levels of the salon. Business plan is important as projecting the income and expenses depends on the scope of the operations of the company, the market area, the conditions of the economy and number and productivity of the employees. In summary, the franchise firm requires less capital for growth and development compared to the non-franchised business. Other differences include, the non-franchised small business is an independent firm with fewer than 15 employees and having sales less than 10 million US dollars a year while franchised business is dependent firm with more than 200 employees with annual sales exceeding 10 million US dollars. A business is franchised to build on size and brand recognition compared to non-franchised businesses which depends on customer contact mode of service. The hairdressing business is owned and managed by one person or two partners while Block real estate brokerage business is owned and managed by more than two people. Majority of small firms like the Harlem hairdressers experience cash-flow problems as they receive minimal financial assistance compared to real estate brokerage firm which has a steady income flow(Ibrahim 49). The real estate firm has more expensive costs like equipment rental, business liability insurance and property insurance while the hairdressing business has fewer costs because it serves a small number of customers. Franchised operators like the brokerage firm tend to delegate their routine activities because of specialization and division of labor while the non-franchised Harlem hairdresser cannot achieve that because they have fewer employees. Block real estate brokerage firm provides training for their staff while the non-franchised hairdressing business had no employee development programs because it solely depended on employee expertise. Franchised Block real estate firm exhibited better accounting framework, proper record keeping and are more involved in strategic planning while the non-franchised hairdressing business that though they have accounting records they are not well laid out(Ibrahim 53). The franchise generated its revenue from franchise royalty fees, services provided to franchises, rebates accrued from suppliers, sales and promotional materials and finally training fees charged. The similarities between Block real estate brokerage firm and Harlem hairdressers include the following. Both need qualified staff for better delivery of services because of highly competitive industries. Optimism for growth is exhibited by both businesses by having objective oriented business plans because both have operational rules. Both businesses incurred high initial startup costs which led to low income in the early periods of doing business. Finally both entities motivated their employees by providing them with incentives to boost their morale and to increase output and reach set goals of the business. In conclusion franchising of a business permits an individual to benefit from the collective power and growth that emanates from the dense franchise network. By sharing a portion of the savings made by the franchisee results in increased operating margins and a competitive advantage of other business models. The business also provided training for their employees making them to easily adjust to dynamics associated with the business environment. In contrast the non-franchise businesses, the owners are highly motivated than the employees in running the business because their capital is at risk. Also the management ability of the franchised firm is greatly enhanced by the input of the franchisor’s knowledge and experience. Research has cited high operating margins as the significant advantage offered by franchising as a business. The small non-franchised businesses like Harlem hairdressers should pool their resources together for them to achieve high sales turnover like the franchised Block real brokerage businesses. Training of employees by the non-franchised business is also recommended to ensure that they have an edge over their competitors in the same service industry. Works Cited Crawford, Linda L and Edward J ODonnell. Florida Real Estate Brokers Guide. Florida, 2003. Cross, B Frank and Rodger Leroy Miller. The Legal Environment of Business: Text and Cases: Ethical, Regulatory, Global and corporate Issues. Texas: Cengage Learning, 2011. Fleming, Louise. Excel HSC Business Studies. Sidney: Pascal Press, 2004. Goldsbro, Jane. Hairdressing: The Foundations. The official guide to S/NQ Level 2. New York: Cengage Learning EMEA, 2006. Ibrahim, Bakri. "Is Franchising the Answer to Small Business Failure Rate? An Epirical Study." Journal of Small Buiness and Entrepreneurship (2000):Vol 2, 49-53. Maria, Moschandreas. Business Economics. Middlesex: Cengage Learning, 2000. Read More