STUDY GUIDE

Topic 4:

BMSB5103

Small Business Management

Franchising

Learning Outcomes
By the end of this topic, you should be able to:
1.

Define the concept of franchising;

2.

Identify franchise options;

3.

Understand the pros and cons of franchising and the structure of the
industry;

4.

Describe the process for evaluating a franchise opportunity; and

5.

Explain the right way to buy a franchise.

Topic Overview
The franchise business has been around for a long time in various forms and
become an increasingly popular form of business system in Malaysia over the
last 20 years. Despite the fact that franchising business has been in existence for
some time already, it is still relatively new in some other industries. No doubt that
franchise business provides one of the business options for new entrepreneurs
who wish to get involved in small business and become entrepreneurs.
Nowadays, franchise businesses exist in a wide range of fields including food
and beverages, fast food, petrol retailing, motor vehicle distribution, real estate
sales, personal services and professional practices.

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STUDY GUIDE

BMSB5103

Small Business Management

Focus Areas and Assigned Readings

Focus Areas

Assigned Readings

4.1

Define the concept of franchising

Moore et al. (2010) Chapter 4, pp 94-95.

Extra Readings:
Scarborough (2012), Chapter 4, pp 112113;

4.2

Advantages and disadvantages of

franchising

Moore et al. (2010) Chapter 4, pp 97,102

Extra Readings:
Scarborough (2012), Chapter 4, pp 113121; Schaper et al. (2011), Chapter 5,
pp117-118.

4.3

Franchising Options and different

types of franchising

Moore et.al (2010). Chapter 4, pp.95-96

Extra Readings:
Scarborough (2012), Chapter 4, pp 113.

4.4 Explain the right way to buy a

franchise

Moore et.al (2010). Chapter 4, pp.113-110

Extra Readings:
Scarborough (2012), Chapter 4, pp 126131.

4.5

Moore et al. (2010) Chapter 4, pp 95-97

Extra Readings:
Schaper et al. (2011), Chapter 5, pp118120.

Franchising from a viewpoint of

franchisee

Other Sources

35

1.

Small
Business
School
www.moschowder.com

2.

Kerry Miller, The Restaurant-Failure

Myth, Business Week (Small
Business Edition), April 16, 2007
www.businessweek.com/smallbiz/co
ntent/apr2007/sb20070416_296932.
htm

3.

S.C.O.R.E., a small business

counselling site
www.score.org/template_gallery.html

4.

Small
Business
www.sba.gov/sbdc

5.

Wall Street Journal

entrepreneurs
www.start-upjournal.com

video

Association
site

for

STUDY GUIDE

BMSB5103

Small Business Management

Content Summary
4.1

What Is Franchising?
x
x
x

4.2

Franchising A marketing system involving a legal agreement,

whereby the franchisee conducts business according to terms
specified by the franchisor.
Franchisor The party in a franchise contract that specifies the
methods to be followed and the terms to be met by the other party.
Franchisee An entrepreneur whose power is limited by a contractual
relationship with a franchisor.

Advantages and Disadvantages of Franchising for Franchisee

x

Advantages:
(a) Probability of success
(b) Proven line of business
(c) Pre-qualification of franchisee
(d) Training
(e) Franchisor-provided
(f) Financial assistance
(g) Franchisor assistance
(h) Operating benefits
(i) Franchisor-aided

(j) Business SOP etc.

Disadvantages:
(a)

Franchise costs

(b)

Initial franchise fee

(c)

Investment costs

(d)

Royalty payments

(e)

Advertising costs

(f)

Restrictions on business operations

(g)

Loss of independence

(h)

Lack of franchisor support

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STUDY GUIDE

BMSB5103

Small Business Management

The major advantages and disadvantages of franchising from the

viewpoint of a potential franchisee are as follows:
Advantages

Limitations

1. Formal training

1. Cost of a franchise

2. Financial assistance

2. Restrictions on business operations

3. Operating benefits

3. Loss of independence

The major advantages and disadvantages of franchising from the

viewpoint of a potential franchisor are as follows:
Advantages

Limitations

1. Reduced capital requirements

1. Reduction in control

2. Increased management motivation

2. Sharing of profits

3. Speed of expansions

3. Increasing operational costs

4.3

Types of Franchising
x
x
x

4.4

Trade name franchising

Product distribution franchising
Pure or comprehensive business system/format franchising

Franchising Options
x
x
x
x
x
x
x
x

Legal aspects vital and must be understood

Franchise contract The legal agreement between franchisor and
franchisee
Franchise The privileges conveyed in a franchise contract
Product and trade name franchising A franchise agreement granting
the right to use a widely recognised product or name
Business format franchising A franchise arrangement whereby the
franchisee obtains an entire marketing and management system
geared to entrepreneurs
Master licensee An independent firm or individual acting as a sales
agent with the responsibility of finding new franchisees within a
specified territory
Multiple-unit ownership Ownership by a single franchisee of more
than one franchise from the same company
Area developers Individuals or firms that obtain the legal right to
open several franchised outlets in a given area
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STUDY GUIDE

x
x
x

x
x

4.5

4.6

BMSB5103

Small Business Management

Piggyback franchising The operation of a retail franchise within the

physical facilities of a host store
Multi-brand franchising The operation of several franchise
organisations within a single corporate structure
Co-branding Bringing two franchise brands together under one roof
Trade Names and Trademarks Success results from intellectual
property such as the names that are well known to prospective
customers
Operations Manual Well-developed and thoroughly tested methods
of marketing and management
Management Support Provides a proven track record leading to a
probability of success; training programmes may be excellent or poor
and should be carefully considered

Right Way to Buy Franchising

x
x

Evaluate personal goal

Consider the franchise options

Talk to existing franchisees

Research the market

Get a copy of franchisors agreement and study it

Ask some franchisors deep and serious questions

Franchisees Viewpoint: How to Evaluate a Franchisor

x
x

Background of the franchisor

Management aspects

Existing franchisees

Product/services produced/offered

Territorial right

Environmental trends/changes

Study Questions
1.

What personality types are best suited to the start-up, purchasing and
franchising options, respectively?

2.

Identify and describe the parties in a franchising system.

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STUDY GUIDE

BMSB5103

Small Business Management

3.

Discuss the advantages and limitations of franchising from the viewpoints of

the potential franchisee and the potential franchisor.

4.

Should a prospective franchisee investigate before investing in a franchise?

If so, how and in what areas?

5.

Based on this case study, answer the questions that follow.

Start-up or solo franchise?
Noman is 28 years old and is currently at university in his final year of a
business degree, majoring in marketing and IT. He has worked in a
variety of jobs, including working for a large firm and in a franchised
operation, and has spent time overseas. He is engaged and his fianc is
pregnant with their first child. They have recently purchased their first
house. You are a business start up consultant and Noman has come to
you for guidance, as he is contemplating working for himself after he
completes his degree.
Noman tells you that he is interested in two prospective business
opportunities. The first one involves purchasing the franchise licence for
a home maintenance business that has been operating in his local area
for the past five years. Noman knows the current owner (48-year-old
Daud), as Noman has worked for him as a part-timer. Noman is
interested in this opportunity because Daud has told him that he never
invested as much time and money in the franchise as he might have.
The second opportunity Noman tells you about involves him starting up
a new business with two fellow university students. Mamat and Lela
have invited Noman to be part of their start-up team for a street clothing
business. They have already attracted an angel investor and want to
launch both a retail and an online store.
Noman has come to you for advice prior to assessing the financial
dimensions of each opportunity. He wants to primarily be guided by your
assessment of which opportunity best fits his skills and background, as
well as his current personal circumstances.
Source: Adapted from Schaper et al (2011)

(a)

What advice will you give to Noman? Explain your reason.

(b)

Do a SWOT analysis of the option you have advised Noman to take.

(c)

Should you recommend a franchise, discuss the necessary steps for

Noman to follow prior to making the investment.

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