Posted: November 29th, 2013
Franchise Business Ownership
Franchise is a business method that incorporates marketing strategies for the sake of rapid expansion of various business ventures. Business franchisors are independent entities in the market that develop outlets, or franchisees and offer to brand them with their id entity and give them a trademark logo. In return, the franchisees are supposed to sign the franchise agreement that stipulates the way they will run their businesses, and this should be done in the presence of the lawyer of the franchisee. Therefore, they must adhere to the business practices of the franchisors to sustain their legal relationship. In most cases, the business practices are accordant to the success of the business. The franchisors also give the outlet businesses the right to sell their goods or services. They are well organized, and they monitor the sales of the goods or service to realize the weaknesses and improve on them. The franchisees enjoy the profits of the businesses if they follow the rules as stipulated in the franchise contract. However, upon breach of contract, there is a threat of franchise termination where the two franchise parties cease to be partners. Although it is usually advisable for established businesses to get into a franchise contract rather than small and new ones, new business are also at a great advantage to become franchisees. However, they must make a good choice. If the franchisor has assessed the business venture and has seen potential growth, it will offer a franchise deal to the business. In addition, franchisors often have training opportunities for the owners of the new businesses that give them comprehensive insight on management and operation strategies. They also provide them with manuals that will act as references in the future. This puts the potential entrepreneurs at an advantage of knowing their competitors and assessing the risks to avoid or mitigate them in the future. In as much as franchising is feasible, there are still other alternatives that businesses can choose for their establishment and operations, though the pros of franchising are weighty as compared to the rest.
The Hatches Coffee Shop is a small business, which two couples, Ken and Mary Hatch want to start up and establish. Both have previously served as employees with Ken having been a caretaker for a local school in Markham for 20 years and Mary, a coffee shop attendant for 8 years. However, they do not have tangible experience in the field of management of restaurants. Ken has vague management skills on supervision considering his promotion to supervisor in the local school, in Markham, while Mary has been an employee in a coffee shop for as long as 8 years. They are very optimistic about the business venture because they need emancipation from the bondage of obtaining orders from the bosses having been employed for such a long time. The Hatches need to commence the coffee shop with minimal risks hoping to reap better benefits. They are pondering on sealing a contract with a successful Canadian Franchise nationally known as Second Cup, which was formed in 1975, Toronto. The Canadian Franchise has shown remarkable development with its extension of 400 outlets countrywide. It operates on a franchise fee of $ 20,000 and a promotional fee of 9% of gross sales. It is based on additional cost of $ 200,000 for equipment and other start-up costs as the total investment for an outlet in Markham. Second Cup also takes the responsibility of constructing the business building of the franchisers and rents it to them. The company offers an extensional service to the franchiser with the help of their bank if the franchiser is unable to begin with $200,000 but is dedicated to seal the deal. Here, the bank finances the remainder of what the franchiser can offer at a levied 5% upon the signing of the contract. Second Cup has a Coffee College at which it offers a three-week comprehensive course pertaining to the training of franchisers on the fundamentals of the coffee and retail business. Presently, Second Cup thrives with five Markham outlets.
The Hatches want to be self-employed by establishing their own coffee shop with minimal risks through a franchise contract with Second Cup. They have a vague idea of management, though not substantial enough to confidently manage the coffee shop since have limited ideas in managing a restaurant. The well organized operating and monitoring system, growing coffee sales and parent company, offer opportunities for success although the Hatches are faced with many experienced future competitors in contract with Second Cup.
Analysis of Firm and Industry
There are competitive coffee houses and shops and fast foods outlets that sell coffee in Markham. The form is perfect competition since there are many shops, outlets and coffee houses selling the same product. This type of form has no barriers to entry of another business involved with selling or serving coffee and it consists of many sellers and buyers while coffee remains the undifferentiated commodity. There are three Starbuck coffee houses in the region, many other independent coffee shops and other fast-food outlets selling coffee. This market form allows the Hatches to venture into the industry smoothly and share the same market as the rest. They have a stiff competitor, Starbucks, who have three coffee houses and are already franchisers with Second Cup.
The key participants in the establishment of the small business are the Hatches and the Second Cup, a Canadian franchise. The Hatches are ordinary employees who are in dire need of being their own bosses by starting up the coffee shop. Despite their lack of proficiency in restaurant management, they have expressed their enthusiasm by conducting a survey on the Canadian Franchise to enable to reach a decision. The decision is based on whether to sign the franchise contract or not. Mary Hatch went a notch higher by gathering information on the Franchise Company and its need of franchisees from her boss in the coffee shop where she has been working. Second Cup has an attractive offer to his clients since it deals with promotion for the product of the small business and it takes charge of the premise of the business by building it and renting it back to the business owners. This pushes the business plan of the Hatches forward and gives them a chance to maximize all the opportunities in the area. As a franchisee, it will work to ensure that the Hatches get all the business information they need. Since Second Cup has partnerships with other coffee houses as well, it is better placed to advise the Hatches on the type of promotion strategies to apply to have a competitive advantage. The Hatches will be able to jumpstart their business growth. However, there is still a probability that Second Cup can be bought off by the Starbucks coffee houses to bend its favor towards them and, therefore, conceal necessary information from the Hatches. If the Hatches do not make the right choice concerning the contract, they will be faced with myriads of challenges that will see to it that their small business crumbles and their capital will go down the drain. Nevertheless, second cup have proven to be more promising by providing them with a financial statement sample that would give the couple a framework for a business plan.
There are important trends that the Hatches should consider before getting into the franchise agreement with Second Cup. The franchise agreement will be a bond between the Hatches and Second Cup for a successful future. It will determine the direction of the coffee shop as a small business and its beneficial outcomes. The three-week course Second Cup is offering the Hatches will enable them to go through the training process, to get insight on major business operations. There are legal implications in case of breach of contract.
The strength of the Hatches coffee shop becoming a franchisee is the fact that they already have a clear starting point. Second Cup will ensure that they have sufficient business training and will organize a premise for them. Upon that, the Hatches Coffee Shop will run on the grounds of the franchise policies, which work to make the small business successful. Second Cup will also ensure that the hatches stick to what is best for their coffee shop when they finally start it. Therefore, the Hatches coffee shop will be treading on the right path. In addition, as a franchisee of Second Cup, the Hatches will have a business privilege of legitimately having a trademarked logo and name for the coffee shop as part of their business plan and marketing expertise. Second Cup has already considered promotion campaigns for the Hatches coffee shop. Another advantage of a franchise agreement is that the franchise company has already established the same contract with other related business like Second Up has with Starbucks. In case of a breach of contract, in the future the Hatches coffee shop together with Starbucks can launch complaints until there are rectifications.
The weakness of this franchise contract would be unexpected investments incurred on Hatches coffee shop. In the event that Second Cup adjusts the conditions of the franchise agreement, for instance the coffee shop’s outlook and withdraws its financial assistance, the Hatches will have to meet up with the costs. This might derail their business strategies making them have a financial hiccup for utilizing a lot of money. In addition, in case of a hike in price of coffee in the future by the supplier recommended by Second Cup as per the contract, the Hatches will not be able to find a new supplier because the contract has no opening for that freedom. Hence, they will not enjoy the profits.
The franchise contract will give the Hatches an opportunity to equip themselves with business knowledge especially since they do not have adequate background on management. They will have an opportunity to assess some of the risks related to their business and conclude on how to mitigate such risks. Second Cup is offering the Hatches a three-week course at their coffee college to enlighten the couple on the fundamentals of coffee and retail business. This will keep the couple on toes concerning the competitive business environment.
The threat the Hatches have upon signing the franchise contract with Second Cup is franchise termination, which would happen if the Hatches do not pay royalties such as the promotion royalties as stipulated in the contract and other unpaid fees. This can be through frivolous litigation or legal release.
There are three alternatives to franchising the coffee shop.
This is a situation where an entity will allow the Hatches to start up a version of its coffee shop under the Hatches name. The first advantage of this method is that the sales process and legal documentation are simple as compared to a franchise agreement. The second advantage is that in licensing, the Hatches will be able to act as an autonomous company making changes and decisions for themselves. Every operation will in line their interest, as opposed to the inflexibility that is in a franchise agreement. The other advantage is that the cost will not be as hefty as in franchising. One disadvantage is that the couple will not have the opportunity to build a brand name and establish themselves in the market through adequate advertisement as franchisees would. This will be detrimental to them because it will be their first ownership venture with inadequate experience. The second disadvantage is that with such limited experience, licensing does not give them the opportunity to go through training as Second Cup does. Hence, the couple will be operating blindly without enlightenment. For lack of knowledge and direction, the coffee shop might crumble. Thirdly, the new business might develop impractical business practices.
No “Fee” Route
The Hatches in this case will have to look for an entity that offers no fee. The entity does not compromise profits fully but develops a transaction structure that does not resemble a franchise agreement. Therefore, the Hatches will choose either to share ownership of the coffee shop with the entity or start a dealership where the entity supplies coffee to the shop as a wholesale while the Hatches become the retailers. The advantage here is that the Hatches will be free from hefty investments like the advertising fees, royalties, training, and initial or equipment fee. The second advantage is that the Hatches will also be in a position to make business decisions autonomously. However, it also has three advantages. The first one is that the entity is not accountable for any training leaving the Hatches on the losing side because of lack of adequate skills. The second advantage is that the hatches will not have a trademarked logo and thirdly the Hatches will not have a good idea of better suppliers in the market. In case they do, they will have already killed their profits.
This method is almost like franchise since the entity also licenses its trademark. However, the trademark licensor does not undertake operational support or control. The advantage is that the Hatches can get the trademark and still operate autonomously. This would earn them publicity and their market would increase. Another advantage is that they will also have a relief on the cost since it does not incur royalties or training costs. Consequently, the Hatches will not be tied to only one supplier of coffee in case of rise in price by their supplier. The disadvantage of this alternative is that the Hatches will not undergo a training program, limiting their capacity to run the business. In addition, since they are incapable of making a good start, they might spoil the brand of the trademark licensor. They might not be able to control how they use the brand name. The third disadvantage is that due to lack of training, the hatches will not assess the risks in the industry and therefore lack competit5ive advantage.
For Ken and Mary Hatch, the best means to use to start up their coffee shop is to accept the franchise contract that Second Cup offers. They are in dire need of becoming entrepreneurs and on that note, franchising will be best because it offers business training, promotion through a trademark logo and premise building. They should sign the contract in the presence of a lawyer to vet the jurisdiction and confirm that the conditions are feasible.
After making a choice of being a franchisee, the first step will be to sign the franchise contract in the presence of a lawyer. The franchise contract courtesy of Second Cup contains rules and regulations that will govern the partnership. It will clearly define the requirement of the coffee shop as a franchisee and the code of conduct to be adopted by the coffee shop. This will be a binding agreement between the Hatches and Second Cup that will serve as a long-term reminder for the business relationship. Since the Hatches are unable to raise the total investment cost, which is $200,000, Second Cup through its bank will accept their savings of $ 20,000 and finance the remainder at 5%.
The building of the coffee shop premise by Second Cup will be another long-term venture because it will establish the location and the market. Once the building is done and the outlook is complete, the Hatches will then venture into the business. Second Cup will in turn rent the building to the Hatches
The training will be vital and it is a long-term investment because the Hatches will undertake a three-week course on the fundamentals of coffee and this will give them insight. They will also develop expertise in the field of management to assess business risks and they will be positioned on the same radar as the other competitors. The training will involve business plan manuals that will give them better ideas on entrepreneurship. These ideas will be used for a long-term in the business enabling it to grow.
Another long-term implementation plan will be the franchisor’s responsibility to give the coffee shop a brand or a trademark logo that will establish it among other franchisees in the same field. This will give the coffee shop permanent recognition in the market because the clients will associate it with the big brand. It might even result to a bigger business in the future. Since clients have already familiarized with the franchisor in the wide market, the Hatches will attain a reputable personality.
Second Cup will also need to establish a relationship between the supplier and the Hatches. They will have to comply with the supplier chosen since Second Cup is in charge and makes the ultimate decision. Since the coffee sales are growing, the Hatches will be sure to have a successful business. They will have good savings by purchasing supplies from Second Cup.
Second Cup will produce marketing expertise who will market the coffee shop in Markham. The expertise will derive unique ways of promoting the business so that the clients are aware of it as a new outlet of Second Cup. This will involve promotional campaigns and advertisements, which the Hatches will have to pay royalties according to the franchise agreement. This will be short-term since it will serve to entice the interest of the consumer and after achieving this goal, the promotion will be toned down.
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