COLLEGE CANADA.
FIRST NAME LAST NAME.
STUDENT ID.
BUSINESS ADMINISTRATION AND COMMERCE.
COURSE CODE
THE FINDINGS OF A REPORT ON FRANCHISING AS AN EMERGING BUSINESS
SYSTEM.
PRESENTED TO NAME.
NOVEMBER 5TH,2020.
TABLE OF CONTENTS.
1 Introduction…………………………………………………. 3
2 Legal Structure………………………………………………4
2.1 Formation……………………………………………………
2.1 Franchisor……………………………………………………
2.3 Franchisee…………………………………………………..
3 Functionality……………………………………………….10
3.1 Financial Institutions………………………………….. 3.2 Start Up…………………………………………………….
3.3 Case Study……………………………………………..
4 Experience Gained………………………………………13
5 Conclusions…………………………………………………15
1 INTRODUCTION.
Franchising is the privilege or right granted to an individual ,a group of people or a company by the government to acknowledge it’s existence and ownership. It is purposely for the selling or distribution of goods and services in a given jurisdiction.
This mode of business has taken swing in most developed economies. Franchising is in the same market scope with acquiring business licenses which has existed much longer. It would be important to look into the performance of the two strategies through a time series. Franchising has an upper hand when it comes to less investment incurred on expansion. On the other hand business licensing possesses more flexibility in carrying out its operations. Primarily franchising is popular due to low equity for setting up a single unit and develops on other resources.
The franchise structure is basically composed of the franchisor who possesses exclusive rights on the business franchise and the franchisee who works under the legal agreement.The franchisor has some legal advantage over the franchisee and this would be an important aspect to study. We would also wish to establish the growth of business franchises and their relationships with financial institutions. The legal procedure of acquiring or setting up a business franchise especially in Canada would be of interest to us.
2.LEGAL STRUCTURE.
2.1Formation.
The formation of business structures of this nature is captured under the Canada Business corporation Act which has since then been adapted by other provinces. Development of these franchises is favorable due to the straight forward nature of forming one. To make matters better is the little payment fee that is prescribed. Aside the prescribed fee is the legal documentation that encompasses the stakeholders, structure, business agenda and the general outlook of the franchise. Foreign investors are accommodated under the same act as they are allowed a maximum of 30 days for notification after formation. A threshold of one billion Canadian dollars was agreed upon by The World trade Organization as the enterprise value for any startup that is indexed annually. Asset values have also been established for direct and indirect acquisitions. The registration of the Franchise can behave differently in various provinces. Law firms are key in the formation of business franchises. There are stepwise procedures in setting up one. Here is the
general form.
∙ Proposal-The manual of operation of the franchise will be reviewed to assess its
eligibility to ensure a solid strategic plan is reached as well as a marketing program.
∙ Funding – Any franchise would need an initial capital funding which would ensure
smooth operation of activities as well as acquisition of assets.
∙ Location-The location of operation or administration of the franchise would also be very
important
Documentation Procedures
The FDDs should be delivered to the franchisees by the franchisor to be able to keep records and legal documented file for the same. Each file should contain a copy of the FDD that is given to the Franchisee or unit developer, copies of all correspondents,an exclusive receipt taken from the Franchisee to show agreement with the disclosure requirements and a copy of the fully outlined franchise agreement (and any additional information regarding personal agreements between both parties agreed business policies ) for every candidate who becomes a successful franchisee. Franchisors are asked to have different filing systems to distinguish
documents for their applications and registrations in each region.
Legal Agreements
In addition to the disclosure and registration requirements in that vary from one province to another in Canada we have laws that govern the release or renewal of a unit and in this case the franchisor is required to give a documentation evidencing that both parties are in good business terms while terminating the franchise association .
These legalities can also give directives on the responsibility of the franchisors after an agreement of parting has been reached for instance repossession of assets or purchase of excessive inventories. Some provinces also have laws that prevent the franchisor from discriminating between similarly situated units .
Other laws , on top of the policies and legal principles that have been set above that only apply to franchising , there are a number of other principal and legality principles that have an effect on franchise firms , from the common law principles of good faith and fair dealing in relationships between franchisors and franchisees and the liability of franchisors to third parties for the acts of franchisees and their employees to other specific areas such as trademark law and antitrust law.
2.2 Franchisor.
The franchisor comes out to have supremacy in the franchise firm compared to the franchisee. The franchisor holds the rights of distribution of goods and services by the franchisee. The franchisor also possess exclusive rights in controlling the business or comes up with the mode of operation of the entity. Representational or distribution of the goods and services are only granted to the franchisee. It is also their responsibility to delegate or carry out by themselves the provision of location assistance including coming up with outlets. The responsibility of the franchisor is very broad as much as they are allowed to assign the tasks to the franchisee.
2.3 Franchisee.
As the second parties of the entity, they are allowed to associate with other franchisees for purposes of teaming up and working together without interference from the franchisor. They are also allowed to rescind the franchise agreement without being penalized within 60 days of receiving the FDD .
Canada has the largest franchise industry after the USA with approximately 76000 outlets across the country. Franchising has numerous benefits when compared to the norm of setting up a business with a license.
ADVANTAGES OF FRANCHISING
GLOBAL GROWTH
Growth becomes faster since working with an established brand is more friendly to start ups. A foreigner would want to enjoy the services of a franchise units that provides the same standards back at home.
CAPITAL
The franchisor will have little to invest with much coming from the franchisee who may enjoy the benefits of an established brand. This becomes a win-win for both parties.
ADMINISTRATION .
Franchises enjoy the setup of administration systems in place that are used to manage the units.
Policies are put in place to ensure smooth running of operations.
LESS WORKFORCE NEEDED
The number of workers needed to operate under a single unit or a branch of a franchise is not very large because of the specialized training of the relevant workers designated in different sectors of the unit. This is much more convenient than the set up of running an entire corporation
.
GROWTH RATE
The growth of a franchise is dependent on the ability of a franchise owner to reinvest in opening up more units. A positive growth rate is characterized by being able to increase the number of units as well as the workforce and their training needed.
FEW OPERATIONS
Systems such as deploying workers in shifts, buying the relevant equipment and strategizing on the location of the franchise in the long run reduce the entire workload by maximizing on the important areas.
RISK FACTOR
The risk factor is generally low to the franchisor as he has very little to invest in a single business unit while the franchisee is not to experience a big risk factor in as much as a lot of money is invested because of the existing business models.
INVESTMENT GROWTH
The growth of initial investment can be witnessed from the accumulated accrued net of the assets belonging to the company.
MARKETING
Policies may be in place to favor the advertisement of a given franchise with an illustration of McDonald’s which puts 4% on annual sales towards advertising. The goal is to be able to reach the target audience and have them aware of their model.
BRAND PRESTIGE
Loyalty is a benefit of an established brand that has stood the test of time. Most of the brands that do well attribute it to the fact that they have customers who with time have become accustomed to the brand.
.
THE DISADVANTAGES OF FRANCHISING
Franchising might also have drawbacks in as much as it has outstanding benefits. Franchising setbacks cannot be overlooked when compared with counterparts such as corporates.
Setting up a franchise network can be costly. The initial cost cannot guarantee to return back profits together with the initial capital cost input. Investments realize profits only after the franchisees start disbursement of fees that are gained from the business units.
Franchisors and franchisees may have disagreements related to the business model. In as much as franchisors have the upper hand in decision making, any disagreements might manifest in the overall performance of the franchise unit.
The risk factors involved are numerous at different levels of the franchising network which therefore demands thorough research and consultation of professionals to overcome any expected
obstacles.
Statistical findings on business units over the past several years in Canada.
2019 76000
2018 75765
2017 75245
The graph illustrates the units owned by Franchisees. The projection seems to be on the consistent rise since 2014. Markedly, the rising increment in franchise ownerships is attributed to the certainty of attaining tremendous business expansion with efficient management. In the same vein, it fosters business stability and sustainable growth by encouraging delocalization of businesses to augment positive returns. Franchising encourages brand awareness that is crucial in attaining extensive knowledge of a brand, thus augmenting sales (Calderon-Monge et al., 2017). In essence, a continued upward growth in the Canadian franchise economy would set the pace for the attainment of substantial progress in the country’s economy.
The graph above projects the quarterly changes in the quarterly total Tim Horton restaurant unit count which has also been on the rise. Notably, its merger with the Wendy’s International expanded the company’s capabilities in reaching new markets, thus facilitating the substantial growth in its unit count together with the marketing capabilities (Musonera, 2019). Markedly, its progress resonates with the positive outcomes of the merger, thus fostering a continued rise in the unit count of Tim Horton restaurant.
3.FUNCTIONALITY.
The operations are regulated depending on the legal acts that have been setup by law. As for
Canada administration is done on the provincial level that has only been enacted by six of them.
A case study on enforcement governing the sale of franchises in Canada, we note that they have to meet an expected standard requirement to be eligible for commercial contracts. A closer look on the conditions of pre-sale disclosure obligations, it comes out that prospective franchisees with an FDD should provide it 14 days before signing any agreement. There are no registration requirements for FDDs.
The franchises uses the normal marketing method system and can also be beneficiaries of the support by the franchisor. Franchising is the framework that binds the franchisor and the franchisee. It seeks to minimize inputs and deliver returns at the same time. Franchisees and outlets are able to carry out their operations with licenses held by the franchisor under the same trademark.
3.1Financial institutions.
The banking sector are more than willing to fund prospective franchise setups. To qualify, a business plan needs to include all necessary information on the franchise, It should give a detailed outline of its mode of operation. It should state clearly the necessary stakeholders and their personal details. The business plan should have details that covers the expected expenditure alongside personal income information to ensure that running the franchise would have stability while running. It should also be able to predict the monthly projections in profits. The business models will likely be tested and granted equity upon success. The guide to grants for financial institutions are ;carrying out research in depth, selecting a prospective franchise accepted by the financial institutions and filing for a grant.
Canadian banks will fund a franchise that has an overall good stakeholder credit score. The will also go through the business plan and assess the capability of the model. They also allow for home equity loans as collateral. Business partners as well as investors can be part of the financial aid. The government might also be a key player in such funding. Canada has a government sponsored program called Canada Small Business Financing loans that can cover for the funding of franchises that have 10 million dollars annual gross revenue in the year they apply.
3.2 Start Up.
The key to setting up a franchise is to begin by identifying a good start up that one can enjoy working with or might have interests in. This can be achieved by working closely with consulting professionals. They will help in assessment and carrying out research on the key areas. They are also aware of the demands of the various franchises as well as the best management practices. Therefore the franchisee or franchisor should be sought for in order to carry out an analysis and a possible agreement between both parties. Other franchisees should also be considered for consultation before coming up with a good location. This will be more than enough information to be able to secure funding and sign an agreement.
3.3 Case Study.
McDonald’s is a big enterprise in the franchise sector. It has the largest chain of restaurants across the globe with over 40,000 active stores and a workforce of about 210,000 employees. It is famous for its fast foods and beverages with burgers gunning the most sales. It has gone as far as gaining ownership of other chains such as the Mexican Chipotle grill and Donato’s pizza. It claims ownership of the land where business operations are carried out which is valued to be about $18 billion. The franchise units are run as their own corporate with government agencies playing a role as well.
It has registered a significant gain in a big part of its financial aspects since its registration. All franchisees are required to undertake a training that is not less than 1 year before opening up a unit. The program undertaken is on a part-time basis. This intense program is aimed at aiding franchisees gain operational expertise which ensures quality customer care services. Training also includes a self-conducted weekly part-time training attending seminars and classes. Prospective investors need a minimum of $500000 which should be one’s own personal resources with an initial fee also included. Generally an initial capital of $2.4 million on the higher side would do.
Beside setting up an ideal location which needs to be owned by the franchisor, a working team of employees should also be part of the training. Also 4% of the gross sales towards advertising as a franchise policy. A minimum of 25% down payment in cash of purchasing the business franchise is also required. The business model of the McDonald’s franchise has seen its success over the
past several years as shown below.
McDonald’s franchise holds a relatively pivotal position in the food service industry. The firm dominates a wider market owing to its expansive delocalization of its services to several countries globally. Notably, the graph depicts the company’s indisputable dominance in the foodservice industry fostered through franchising. Its ardent customer oriented aspirations together with efficient marketing policies has widened its dominance in the market while ensuring a continued dominance in the industry (Chia et al., 2020). Notably, its dominance continues to grow amid the growing exploration of newer markets that would provide newer segments for their cuisines.
4.1Experience Gained.
Research carried out in this field has been enriching and has given foresight to what is important when dealing with the franchise business. Skills developed in this research are decision making, analysis and due diligence. This are core skills that would be needed for somebody looking to be a business consultant. To be a good consultant one must be able to conduct deep research, conduct analysis on data and draw inferences based on the findings and so far it is part of my qualities as a prospective consultant. Going back in time, I would choose the same program as it suits my interests.
5.Conclusion.
This marketing concept can have an effect on the unemployment rate in a positive way in terms of job creation. It also accommodates prospects with little to spend in terms of capital. The various institutions willing to provide financial assistance is also a positive indicator. It will also mean that the models that will be available in the market will be more refined and allow significant growth in the economy. The risk factor is also considered to be low as the structure of any franchise should be friendly in setting up and maintaining.
Annex
Fdd-Franchise Disclosure Document.
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