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Challenges to Starting a Franchise

Paper Type: Free Assignment Study Level: University / Undergraduate
Wordcount: 2607 words Published: 26th Feb 2020

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There are many paths for entrepreneurial ventures. This includes franchises, creating a new venture, acquiring an old venture. But there are disadvantages too. These disadvantages include questions about why a venture is being sold and gives an insight into the business, but there are also disadvantages to owning a franchise for an entrepreneur. This can lead to the entrepreneur trying to make the ultimate decision of choosing which root that they may take. There are many paths to having an entrepreneurial venture this being creating a new venture, buying an old venture, or buying a franchise. Some entrepreneurs decide to start their own venture. They can start a business with their own products, ideas, and services. They could also start a new business and improve a product or service in their new business. Some entrepreneurs buy preexisting ventures. When buying a venture, you are buying a business that most people may know about “A successful business already has demonstrated the ability to attract customers, control costs, and make a profit. Additionally, many of the problems a newly formed firm faces are sidestepped.” (Kuratko, 2017, p. 156) When buying a preexisting venture everything is already done because the previous owner has put in years of work to get the venture to where it is. “Therefore, if the new owners treat the workers fairly, they should not have to worry about hiring, placing, and training personnel. In addition, the previous owners undoubtedly have established relations with suppliers, bankers, and other businesspeople” (Kuratko, 2017, p. 156). An owner may sell their business for many reasons some being emergencies when they sell these ventures they must sell them for a good and reasonable price. “The owner of a successful small venture built the enterprise through skillful business practices, knows how to deal with people, and has a good idea of the operation’s fair market value. That person will rarely sell for much below the fair market value” (Kuratko, 2017, p. 156). If the venture is sold for a low price something may seem off and make the venture seem as it is a risk to buy. Advantages of franchising include training and guidance, brand name appeal, a proven track record, and financial assistance. Training and guidance are an advantage because you receive assistance to start your business, compared to a small business owner who has to do this on their own. “Perhaps the greatest advantage of buying a franchise, as compared to starting a new business or buying an existing one, is that the franchisor usually will provide both training and guidance to the franchisee” (Kuratko, 2017, p. 162). Brand name appeal helps you get customers due to the fact that it is a well-known brand. Since it is a well-known brand, customers know what the products and services are already you are guaranteed a higher chance to succeed. “The franchisor’s name is a drawing card for the establishment” (Kuratko, 2017, p. 162). A proven track record is that the franchise has already been proven to be successful, which means that they are most likely to stay successful in the coming years. “If all of the units are still in operation and the owners report they are doing well financially, one can be certain the franchisor has proved that the layout and location of the store, the pricing policy, the quality of the goods or service, and the overall management system are successful” (Kuratko, 2017, p. 162). Financial assistance means you are guaranteed assistance with starting your franchise. “In short, buying a franchise is often an ideal way to ensure assistance from the financial community” (Kuratko, 2017, p. 163). This means you will get all the help you need until your franchise is running perfectly fine. There are many challenges of Entrepreneurial ventures. Many of these challenges tend to be the disadvantages that entrepreneurs may face. One challenge is acquiring an already existing venture. When acquiring an existing venture you don’t know what you are getting into without the research and asking yourself important questions about the venture. The first question is, why is the business being sold? It is important to know why the business is being sold it could be because the owner is retiring, wants to start something new, or has another opportunity. The entrepreneur planning on buying the venture should do some research to determine if it is a good idea to buy the venture. When this happens, the entrepreneur must research business related information when deciding to buy the business. “It is difficult to substantiate this sort of personal information, the next best thing to do is to check around and gather business-related information. Is the owner in trouble with the suppliers? Is the lease on the building due for renewal and the landlord planning to triple the rent? Worse yet, is the building about to be torn down? Other site-location problems may relate to competition in the nearby area or zoning changes” (Kuratko, 2017, p. 157). Another thing that is important is knowing if the owner is planning on creating another business because this could mean that the venture you just bought could have competition with the previous owner. “Financially, what is the owner going to do after selling the business? Is the seller planning to stay in town? What employment opportunities does he or she have? The reason for asking these questions is that the new owner’s worst nightmare is to find that the previous owner has set up a similar business a block away and is drawing back all of the customers. One way to prevent this from happening is to have an attorney write into the contract an agreement that the previous owner will refrain from conducting the same business within a reasonable distance for a period of at least five years” (Kuratko, 2017, p. 157). The next question is, what is the current physical condition of the business? It is important to know the physical condition of the business, “Even if the asking price for the operation appears to be fair, it is necessary to examine the physical condition of the assets. Does the company own the building? If it does, how much repair work needs to be done? If the building is leased, does the lease provide for the kinds of repairs that will enhance the successful operation of the business?” (Kuratko, 2017, p. 157). The physical condition can lead to finding issues which may lead to reasons why the previous owner may have sold the business, “Meanwhile, if the landlord does not want to make this type of investment, the new owners must realize that any permanent additions to the property remain with the property. This means that if something simply cannot be carried out of the building, it stays” (Kuratko, 2017, p. 158). The next question that an entrepreneur may ask is, what is the condition of the inventory? The main thing that the entrepreneur should check is if the inventory is stable. The entrepreneur should know if the inventory is deteriorated or if it is out of date. Another thing you may what to know is, what is the state of the company’s other assets? It is a good idea to look at the record of the company to know what their other assets are like. This can also help you can prevent risks of stock being too low or too high.  “If the business has kept careful records, it may be possible to determine who is a good credit risk and who is not. Additionally, these records make it easy for a new owner to decide how much credit to extend to the prior customers. Likewise, sales records can be very important because they show seasonal demands and peak periods” (Kuratko, 2017, p. 158). Another thing that is important is the reputation of the business, this is because businesses build goodwill with customers. “Finally, the prospective buyer must look at an intangible asset called goodwill. Goodwill is often defined as the value of the company beyond what is shown on the books” (Kuratko, 2017, p. 158). The one thing that is most valuable to the business is its reputation. An entrepreneur will want to know is, how many of the employees will remain? It is important to know is the employees will remain or leave the business when the new owner takes over. “It may be easier to retain valuable employees by seeking them out before the purchase to ensure their feelings of security,” (Kuratko, 2017, p. 159). Employees are an important part of a successful business. Next, you may want to know, what type of competition does the business face? This is important because there may be competition close by. When there is competition nearby businesses tend to spend more on advertisements. “The greater the competition, the less the business’s chance of earning large profits. As the number of competitors increases, the cost of fighting them usually goes up” (Kuratko, 2017, p. 159). Where the location of a service determines if you will do better than your competition. If your business is not in a convenient area the competing business will have more customers. “Then the location of the competition must be considered. In many instances, a new venture does not offer anything unique, so people buy on the basis of convenience” (Kuratko, 2017, p. 159). Competition is cutthroat so businesses use practices like price fixing a lot. “Finally, any analysis of competition should look for unscrupulous practices.” (Kuratko, 2017, p. 159). The last question someone may ask is, what does the firm’s financial picture look like? It is important to know if the business is making a profit. “It may be necessary for a prospective buyer to hire an accountant to look over the company’s books. It is important to get an idea of how well the firm is doing financially” (Kuratko, 2017, p. 159). If the firm is making money it is important to compare the firm’s performance to the competitors. “Another area of interest is the firm’s profit trend” (Kuratko, 2017, p. 160). These questions are important to ask because they help you determine the challenge of choosing to buy the venture or not and help you determine if the venture will be a risk. The next challenge is the disadvantages of starting a franchise. The disadvantages of franchising are franchise fees, franchisor control, and unfulfilled promises. The challenge of franchise fees is that it is based on how large and successful the franchise is it will determine the franchise fee, “The franchise buyer typically pays an initial franchise fee, spends his or her own money to build a store, buys the equipment and inventory, and then pays a continuing royalty based on sales,” (Kuratko, 2017, p. 163). A franchisor may assist the franchisee and pay for most fees of the franchise, but the buyer must have part of the initial cost for the franchisor. “Most franchisors require buyers to have 25 to 50 percent of the initial costs in cash. The rest can be borrowed—in some cases, from the franchising organization itself.” (Kuratko, 2017, p. 163). The next challenge is franchisor control this means that the franchisor tells you what you must do and you as the franchisee must abide them and not go against the franchisor. “In a large corporation, the company controls the employee’s activities. If an individual has a personal business, he or she controls his or her own activities” (Kuratko, 2017, p. 164). Franchisors like to have uniformity. The franchise license can be at risk of being renewed when the contract expires if the franchisee does not do what is asked by the franchisor. The last challenge of starting a franchise is unfulfilled promises. Sometime you may not receive everything that the franchisor has promised you. “For example, many franchisees have found themselves with trade names that have no drawing power. Also, many franchisees have found that the promised assistance from the franchisor has not been forthcoming” (Kuratko, 2017, p. 165). A promise that is not always followed through by a franchisor is a way to pay less for supplies, “For example, instead of being able to purchase supplies more cheaply through the franchisor, many operators have found themselves paying exorbitant prices for supplies.” (Kuratko, 2017, p. 165). A major disadvantage is that if there are complaints about unfulfilled promised you could be at risk of an agreement being terminated or not renewed. There are many examples of ventures and franchises that are common in the world. One example of someone who started a new venture is Mark Zuckerberg he was a student of Harvard University who founded Facebook in February of 2004. His success has made Facebook one of the most trafficked sites on the internet, all because he was unhappy with the small amount of the networking facilities that are on the campus. Lately, people want to start a business but may not have the fund for it, and fewer businesses are not the best for the economy. “A decline in entrepreneurship is troubling for the economy for a variety reasons—especially when starting a business is seen as a major part of the American dream for many millennials” (Meyer, 2015). The competition also makes it harder for entrepreneurs start up a business. Some popular franchises that people buy are Dairy Queen, Dunkin’ Donuts, Burger King, McDonald’s, Papa John’s pizza and Subway. People who decide to start one of these franchises are at a great advantage. Since these franchises are well known for their good service and are well known, these franchisees will have a large advantage of staying in business due to the well know franchise that they just opened. Opportunities to start one of these franchises can be found through the internet and magazines. These recourses give you information about the franchise and their requirements. When it comes to choosing a path to take I would recommend starting a franchise even though there are some disadvantages of owning a franchise the advantages weigh them out. When you start a franchise you as the franchisee will receive help from the franchisor when you start to get your franchise up and running until you no longer need the help. Also, if you start a franchise that is well known the name of the franchise may attract customers. These known franchises have a proven track record which is great because it has already been proven that the franchise is successful. You are also receiving financial assistance when you start a franchise you will receive the financial help that you need when you first start the franchise. Even though you may not have control of a franchise like you would if you had your own enterprise, you will have help starting your franchise unlike when you start your own venture you will not have much help. Therefore, there are many ways for an entrepreneur to find opportunities. The entrepreneur must assess each option they have to help determine what may be best for them or what they may be most comfortable with it that moment. Even though there are many disadvantages there are also many advantages that the entrepreneur will have to choose from These options can be starting a new venture, acquiring an old one or starting a franchise. The ultimate decision of what will happen is up to the entrepreneur.

Works Cited

  • Kuratko, D. F. (2017). Entrepreneurship: Theory, process, practice (10th ed.). Boston, MA: Cengage Learning
  • Meyer, J. (2015, July 28). Millennials Want To Be Entrepreneurs, So Why Aren't They Starting Businesses? Part 1. Retrieved from https://www.forbes.com/sites/jaredmeyer/2015/07/20/millennials-entrepreneurship-starting-businesses/#424a2bd01d63


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