Developing and Managing an Enterprise - Essay Example

Developing & Managing an Enterprise Identifying the advantages and disadvantages of operating the business as a franchise compared within openinga stand-alone venture (25 marks) A standalone is a business is one which operates independently and is owned by the proprietor running the business. Such a business usually has no association or endorsement with any other company in terms of its name, processes and operations. "A stand-alone business typically comes with an established customer base, unless you will move the business to a new location" ('Should You Purchase a Stand-Alone Business or a Franchise', p1) A franchise on the other hand is a business which buys the license form another company to operate under its company name and make use of its copyright protected and trademarked brands and business concepts. One of the most famous franchised businesses around the world is the McDonalds franchise. ('Diversity in Franchising: McDonald's strives to mirror its communities', 2005) The original parent company of McDonalds is situated in Central North America, but the company has operations in more than 175 countries around the world. Majority of the operation of the company are operated by franchises in which separate franchisers buy the rights to operate their business under the name of McDonalds while providing the same quality and service in its products as is the product and service offering of the McDonalds Company. (Rensi, 1995) Standalone businesses as well as franchises can be launched by entrepreneurs who seek to establish unique and innovative business. The main difference between an entrepreneur and any other form of business man is that entrepreneurs are willing to take on risks. They do not take on excessive risk; instead they are "calculated risk takers, who define the risks inherent in any venture and attempt to minimize them" (Kathleen, 2006, p6) The advantages that are available to standalone businesses pertain to the fact that the proprietor can run the business, according to their own wishes and plan the product and service offering as per the plans of the proprietor (Lewis, 1994). They have almost complete control in the development of the business, its strategic expansion as well as the positioning of the company and the products in the market. "The advantage of buying an independent business over a franchise is that the business you buy is yours to do with what you will. You do not have to maintain any aspects of the business that do not increase profits, and you can implement new ideas as you see fit. In fact, some business buyers look for struggling businesses that are undervalued because they know they can improve their profitability. Once the transition has been made, as the new owner, you have the full decision-making power." ('Should You Purchase a Stand-Alone Business or a Franchise', 2008, p1) The disadvantage of a standalone business however pertain to the increased risk that the company has to bear and the limited resource for funding and support that are available to the business. "Of course, with greater flexibility and full control comes increased risk. After all, as an independent owner, the business is contingent on your decisions. For this reason it is not always easy to obtain the necessary financing without an established track record of running such a business." ('Should You Purchase a Stand-Alone Business or a Franchise', 2008, p2) Moreover the business is solely responsible for establishing new relationships with suppliers, clients as well as vendors, distribution agents, media contacts and developing the marketing campaign of the business. The advantages of operating a franchise include that the franchise business is formed with a basis of a proven idea supporting it. Moreover it is possible for business to assess the performance and the success of other franchises of the same company before committing one. (Peterson & Dant, 1990)Aside from this, in a franchise the business can use recognized brand names and trademarks. The franchisor also provides support to the franchisee and the financing in case of a franchise is easier to obtain from the bank as well as from investors. The risk of operating and success is reduced as the risk is shared with the franchisor. ('Advantages and Challenges of Franchising', 2006) Moreover the franchise business has access to the market share and customers of the franchisor. Additionally relationships with suppliers are already established in this case. Other benefits are available to the franchise as well. These pertain to the "franchisers generally providing training to new franchisees. Such training can be extremely valuable for neophyte entrepreneurs. Many franchisers provide constant national or regional advertising (ever had a McDonald's jingle stuck in your head). Furthermore, two or more nearby franchises can pool funds and advertise together." ('The Advantages of Franchises', 2008, p2) The disadvantages of franchise business pertain to the costs which may be higher than expected. These costs include the initial cost of buying the franchise and the routine royalty which is paid to the franchisors. The franchisor also puts restriction on the franchise in terms of the quality standard which needs to be maintained, the policies that need to be established. In all basically how the business is run is determined by the franchisor. "The franchisor may have a great program and a respected name, but in the final analysis much of the risk is in your hands." ('Advantages and Challenges of Franchising', 2006, p28) Moreover the risk of franchisor going out of business affects the franchise businesses in a negative manner. The reduced risk, in terms of the risk being shared results in lower profits for the franchisor. Additionally the reputation of other franchises of the same company can affect the business as well 2. What are the internal strengths and external opportunities that Paul's franchise would face What were the internal weaknesses and external threats (25 marks) Strengths The strengths that are available for Paul's franchise pertain to the fact that the franchisor will be supporting the franchise business in terms of marketing campaign for the region, providing training for the staff as well as providing information on how to manage the franchise to Paul. Aside form this the franchisor name will enable the business to access sources of financing as well as utilize the contacts of the franchisor like distributors, suppliers and vendors who could provide the business with the required resources. There is also strength for the business in terms of the numbers of its outlets (Rennick, 2005).Additionally it would be much quicker for the business to start up and commence operations than standalone operations. Aside form this the business also has access to other franchisors of the franchisor which can aid the business in providing it with the best possible strategy to under take in different situation which would form a draft roadmap for the development of Paul's franchise business. Weaknesses There are certain weaknesses which are inherent in the franchise business for Paul. These weaknesses pertain to the customer expectations and the delivery of product and services by the franchise. The performance and reputation of other franchises of the franchisor determine in the reputation and success of Paul's franchise. Therefore any fall in the product or service quality standards at other franchises would effect the reputation and the traffic of Paul's franchise in a negative manner. "Some prospective franchisees have unrealistic expectations concerning the income they will earn from their business. If unmet these unmet expectations can cause the franchisee financial problems and make them regret the investment they made. While unmet expectations are a weakness inherent in franchising, it is also a weakness of every business whether franchised or independent." (Seid, 2004) Other weakness of Paul's franchise pertains to risk borne by the franchise in terms of the estimation of the expenses of the company. Opportunities The opportunities that are available to Paul's franchise business pertain to the expansion of the business in a short period of time in the region through the leverage attained from the use of the franchisors name. IN the long run the business has the opportunity to attain a major share of franchising in the region. Threats The threats that are apparent for Paul's franchise business are related to the performance of the other franchisers and the success and failure of the franchisor business. This failure can be a result of overestimating and forecasting of profit, revenue as well as the demand for the products being provided by the franchise business of Paul. Aside from this the changing environmental elements of the political, socio economic, technological as well as legal environment surrounding the business can also affect the success of the franchise venture. In case of failure of the franchisor business, the franchise will be drastically effected, resulting in the franchise agreement being dissolved making Paul continue his business as an independent operation without the support that was previously attained by the franchisor. The bad service standards of other franchisers sharing the same name as Paul's franchise can also negatively effect the business by reducing the sales and revenue, as the customer's perceptions will be changed for all outlets and franchises operating under the specific name. franchising requires time, initiative and industry for success, and while franchising in the food and restaurant industry as well as retailing is very successful, the extent of the success for the industry in which Paul seeks to operate in needs to be identified by Paul in order to reduce the threats of changes in the environment and customer demands affecting the profitability of the business. 3. Paul states that one of the primary reasons he wants to go into business for himself was the financial reward. Based on the figures given in the case study, do you think that Paul has made the correct decision Why The primary reason mentioned by Paul in the case study for initiating the business as a partnership franchise was due to the financial reward that he would attain in terms of equity and profitability. In the future Paul also seeks to increase his profit share and stake in the business to 49 percent which would provide him with access to higher rewards on the performance of the franchise business in the market. However there is a slight problem with the figures states by Paul. Essentially, forecasting performance of a franchise business is not an exact science, and often franchisees can overestimate their revenues while underestimating the costs. "While it comes as a surprise to many, finding out how much a franchisee can earn is much more difficult than it seems. Indeed, simply calling in for a quote is virtually impossible today, given that a large portion of the franchise companies are extremely reluctant to disclose figures on a potential franchisee's earnings and possible rates of return." ('Assessing Franchise Profitability', p1) It is stated in the case study that Paul tried to determine the realistic figures which would apply to his launch of the franchise business and its operations in the region, based on the figures provided and quoted by the other franchise business of the same franchisor. This was very much of a realistic approach than simple budgeting or forecasting, however marketing conditions and the external environment for the business can cause changes in the operating environment for the business (Remus, O'Connor & Griggs, 1998), making the figures quotes by other franchisors obsolete. In this regard it is possible for some figures to be understated and overstated resulting in a vague depiction of the performance of the business in the coming years. Based on the figures that were provided by Paul in the case study for the sales, gross profit and the projected expenses that would be incurred by the franchise business, the gross profit margin and the net profit margin for the three years of operations has been determined. This analysis depicts that the profit that would be available to the partners after the payment of expenses and before the payment of tax on individual share is $187,800 for 2003, $201,100 for 2004 and $201,100 for 2005. The GP margin is at 0.65 for 2003, 2004 and 2005. The NP margin however is at 0.218, 0.239 and 0.248 for 2003, 2004, and 2005 respectively. Based on these figures, the investment by Paul in the franchise for financial rewards is justified. 4. Paul and Peter decided to form a partnership. Compare and contrast this form of business structure with that of a company. Consider all relevant aspects of this choice (e.g. legal, financial, and Organizational). There are three main types of business, which include sole proprietorship, partnership as well as incorporated business known as corporations or companies ('Ownership Structures, 2008'). These businesses differ from each other in terms of their structure, their operation as well as in terms of how they are legally represented in the market. The ownership and liability of the owners in these structures is also significantly different. In this paper however Partnership and Corporations are discussed in detail. A partnership business is based on an agreement between two or more partners who invest resources, capital and time in launching the business and keeping it operational. "You don't have to file any paperwork to form a partnership -- the arrangement begins as soon as you start a business with another person." ('Ownership Structures, 2008', p2) The partnership is built around the partnership agreement in which the specific partners are identified, the roles of the partners are outlined and the capital invested by the partners is clearly depicted. Additionally the agreement also highlights the profit sharing ratios of the partners, according to which the partners distribute the profits of the business amongst themselves. "It is difficult to think about a "break-up" when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be problems. They also must decide up front how much time and capital each will contribute." ('Sole Proprietorship vs. Partnership vs. Limited Liability Company (LLC) vs. Corporation vs. S Corporation') The advantages of the partnership pertain to the fact that partnerships are easy to establish than corporations as they have less legal documentation to process. Aside from this when there is more than one owner in the partnership, the ability to raise capital and funds are increased as opposed to a sole proprietor (Cain, 2003). The profits of the business also flow directly to the partners who have to pay tax on the income that they earn. No partnership tax is levied (Auster & Crammer, 1993). The disadvantages of the partners however include the fact that the partners in the partnership are liable for the success as well as the failure of the business as a result in case of bankruptcy they have to provide their creditors with the amount due through their own personal finances (Daugherty, 1980). Aside from this the profits have to be shared in the partnership which can lead to disagreements in later stages of the business. Moreover the partnerships have a limited life in terms of their duration as it can end whenever one partner decides to leave, or with the demise of a partner. In terms of the legal aspect partnerships are easier to form, they have less documentation to process. The one document, the partnership agreement is the main document which forms the basis of the partnership. In a partnership, the finances that have to be raised are usually raised by the partners themselves in collaboration with their contacts. They can seek out business and bank loans when in need of funds; however banks and financial intuitions usually are critical and wary of disbursing loans to partnerships due to their volatile nature. Organization wise partnerships revolve around the two partners who are the owners of the business (Homes & Zimmer, 1998). They have specific profit sharing ratios established in the partnership agreement which is usually set on the basis of their involvement in the business, and the amount of investment they make in the partnership A corporation is a company which is a separate entity from its owners. In case of a company their can be multiple owners who have a share in the profits of the company. These owners are referred to as the shareholders of the company. In a corporation the owners of the company are not necessarily involves in the management and running of the company. "When a company is incorporated, it acquires all of the powers of an individual, an independent existence - separate and distinct from its shareholders, and an unlimited life expectancy. In other words, the act of Incorporation gives life to a legal entity known as the corporation, commonly referred to as a company. A company can acquire assets, go into debt, enter into contracts, sue or be sued. Ownership interests in a corporation are usually easily changed. Shares may be transferred without affecting the corporation's existence or continued operation." ('Proprietor/ Partnership vs. Incorporation') The characteristics of a corporation include the limited liability that is available to the owners and members. The organization of the corporation is such that it is regarded as a separate entity from its stakeholders and therefore in case of loss, debt or bankruptcy the stakeholders are not liable to pay out of their own finances (Llewellyn, 1921). This reduces the risk in a corporation for the stakeholders. The shareholders are not responsible for running the business; however they can effect the decisions being made for the company. A board of directors and a management is appointed which is responsible for running the business. Moreover succession for the corporation is possible (Vandenack, 2004), as in case of any shareholder or member, the company still remains incorporated and operational as opposed to the partnership which dissolves in such circumstances. In terms of legal issues, the corporation is a much complex business to establish and register as it requires multiple documents to be registered. A memorandum of association and article of incorporation are required for the corporation to be registered. Moreover there are specific restrictions on the type of corporations being formed and the amount of stakeholders and board of directors the company can set. The financing for a corporation is relatively easier as the finances can be generated by issuing out shares of the company through a public or a private offering (Nicolai, 2000). Moreover financial institutions are also less reluctant in proving the corporations with loans. 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S-Corporation, National Underwriter / Life & Health Financial Services, Vol. 108 Issue 7, p43-44, 2p, retrieved June 25, 2007 from http://web.ebscohost.com/bsi/detailvid=1&hid=4&sid=db592ca7-cd2c-4952-a3af-4599527826c5%40SRCSM1 Read More