Business Studies

Franchise Business Structure: Types, Advantages and Disadvantages

len Alfred Ajibola - Sun, 24th May, 2020 @ 13:53: PM

Topics in Business Studies

Franchise Business Structure: Types, Advantages and Disadvantages What is Corporation? Types, Advantages and Disadvantages of Corporations What is Limited Liability Company? Its Advantages and Disadvantages Partnership in Business: Types, Advantages and Disadvantages Business Studies: What is Business Studies and Business? Management: Elements of Management What is Management? Importance of Management Advantages and Disadvantages of Air Transport Advantages and Disadvantages of Rail Transport Methods of Payment: Cheque - What is a Cheque? Cheque: Types of Cheque Cheque: Characteristics of Cheque Advantages and Disadvantages of Cheque Advertising and Types of Advertising Advantages and Disadvantages of Road Transport Advantages and Disadvantages of Water Transport Consumer Protection - Agencies of Consumer Protection Consumer Right and Protection Methods of Payment: Credit Cards and Debit Cards Methods of Payment: Bank Notes and Coins | Characteristics of Legal Tender


Academic Questions in Business Studies

Please check out our Test Your Knowledge page to see all Questions and Answers

Which of the following is NOT a characteristics of business?

  • A. The buyer and seller must always come into a contract agreement

  • B. Risk from unforseen circumstances is involved

  • C. They are subject to policies made by the government

  • D. All business transaction is aimed at making profit

  • E. It requires a discontinuous transaction between the buyer and the seller

  • F. Investments are required to begin a business

Which of the following is not a Right of Consumer Protection?

  • A. Right to Education
  • B. Right to Choose
  • C. Right to Safety
  • D. Right to the Good things of Life
  • E. Right to be Assured
  • F. Right to Compel

Which of the following is NOT a government agency of consumer protection?

  • A. Ministry of Sports
  • B. Ministry of Commerce
  • C. Consumer Protection Council
  • D. Ministry of Health
  • E. Ministry of Environment
  • F. National Drug Law Enforcement Agent

Define Consumer Protection.

In buying and selling, the retailer will usually operate from the stall while the wholesaler operates from the _____.

  1. Chain store
  2. Hyper market
  3. Hypo market
  4. Warehouse
  5. Mobile shop
  6. Supermarket

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What is a Franchise?

Franchise is a business structure utilized by manufacturers, producers (or anyone rendering a service) in order to gain a larger reach in the distribution and sale of their products.

The establishment of a franchise requires an agreement between the parent company (called the franchisor) and another company, group or individual (called the franchisee). The franchisee can only carry out related commercial activity on behalf of the franchisor after a franchise agreement had been reached.

As an instance, a parent company (franchisor) that produces drugs may require an individual or a group or another company (the franchisee) to become an official distributor for their product.

Please read more on the Concept of Business Structure and Sole Proprietorship here.

Note: A franchisee is an individual or company that has been liscensed to do business on behalf of another company called the franchisor.

The franchise business relationship is based on a legal contract and agreement between the franchisor and franchisee; and such business relationship is contained in the franchise agreement. To this end, The franchisee will have to purchase a franchise from the franchisor.

You can read on Corporation as a Business Structure here.


Types of Franchise Relationship

There are various types of franchise relationship but we will consider three in this article. These are:

1. Single-Unit Franchise

The single-unit franchise is also referred to as a direct-unit franchise. Here, the franchisee invests its money by agreeing to operate the franchisor's product or brand in only one location.

The single-unit franchise is often considered as the simplest and oldest form of a franchise business structure, although it's still common to this day.

You can read on Management and Elements of Management here.


2. Multi-Unit Franchise

The multi-unit franchise (also known as an area developer franchise) refers to a process whereby the franchisee operates the franchisor's product over different areas or locations at a specified period of time as contained in the franchise agreement between both parties.

The franchise agreement signed by the franchisee in a multi-unit franchise will include the franchisee agreement and developmental agreement. This agreement implies that the franchisee has a right to open multiple business locations within the specified area while the franchisor permits the franchisee to run its developmental schedule.

Note: When a multi-unit franchisee fails to meet it's developmental schedule, the franchisor may cancel the developmental agreement, thus keeping the area development fee (which is supposed to be paid in advance to the franchisee).

Please read on Partnerships in Business, Types, Advantages and Disadvantages here.


3. Master Franchise

The master franchise enjoys the privileges of a multi-unit franchise. In addition to having a right to operate the franchisor's product in different areas (multi-unit franchise), they also have the privilege to sell franchise to those seeking to become franchisee within the product's line. In this case, the master franchise becomes the franchisor in the area where they are present; and they collect a fee known as the unit franchise fee. They usually share this fee with their franchisor (parent company). However, the percentage for each fee may vary.

You can read on Limited Liability Company (LLC), its Advantages and Disadvantages here.

Note: The master franchise is required to sign the master franchise agreement, while also paying a fee (called the master franchise fee) to the franchisor.

In regards to the nature, terms and responsibilities comprising the master franchise agreement contract, it becomes the most complex of all the franchise relationships. In addition, a disclosure statement and franchise registration is required.


Advantages of a Franchise

  1. Small business owners will enjoy the benefits of a larger business network.
    Please read on the Principles of Marketing here.
  2. Experience may not be a necessity when starting a franchise. This is true because the parent company (franchisor) may provide the trainings needed.
    Please read on Inbound Marketing here.
  3. The franchisee may acquire products for free and pay back after sales had been made.
    Please read on the Wholesaler here.
  4. The franchisor may run adverts on their products. (This is of benefit to the franchisee).
  5. The franchisor may spend less when sourcing a franchisee on a per-unit basis.
    Please read on Advertising here.
  6. Since the franchisee isn't monitored by the franchisor, it therefore implies an ease of supervision on the part of the franchisor.
    You can read on Division of Labour here.
  7. A multi-unit franchisee can significantly increase the market demand for a product.

  8. The selling power of a known brand can rapidly earn the franchisee more profit.
    Please read on the Concept of Market in Economics here.
  9. The franchisor can reduce the expenses spent on staff salaries since the franchisee may assume some of these roles.
    You can read on Cost and Types of Cost here.
  10. A new product from the franchisor can easily penetrate the secondary and tertiary markets via the actions of the franchisee.

Disdvantages of a Franchise

  1. The franchisee may have to pay some amount of money before a franchise can commence.
  2. There is a need for a formal (legal) agreement before a franchise can exist.
  3. The franchise agreement may spell out how the franchisee may run the business, thus presenting no room for new innovations from the franchisee.
  4. The strategy of some franchisee or markerters may bring disrepute to the franchisor.
    You can read on Retail Market here.
  5. The franchisor will typically determine the operational space of the franchisee. This may reduce the mobility and profit margin of the franchisee.
  6. The franchisor have the right to terminate the franchise agreement at the end of the franchise term. This action may adversely affect the franchisee.

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Alfred Ajibola is a Medical Biochemist, a passionate Academician with over 7 years of experience, a Versatile Writer, a Web Developer, a Cisco Certified Network Associate and a Cisco CyberOps Associate.


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NOTABLE POINTS IN Business Studies

Consumer protection refers to the ways or methods through which consumers enjoy maximum satisfaction from the goods they buy and services rendered to them.

The agencies of consumer protection assists in protecting the consumer rights. These agencies may also be referred to as the organs of consumer protection. Basically, we have three of them, they are:

  1. Government Agencies
  2. Independent Agencies
  3. Legislation

Please read on Consumer Protection here

One of the responsibilities of the government of every nation is to set up agencies or organizations that will protect the interest of the consumers and invariably, the people.

Below are some of the Government Agencies of consumer protection:

  • National Drug Law Enforcement Agency (NDLEA)
  • National Agency for Food, Drug Administration and Control (NAFDAC)
  • Consumer Protection Council (CPC)
  • Rent Tribunal
  • Ministry of Health
  • Ministry of Commerce
  • Ministry of Transportation
  • Ministry of Environment
  • National Wages and Salaries Commission

Please read on the Government Agencies of consumer protection here