Franchiser the entity that offers a franchise

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ement works this way: (1) The franchisee pays an initial fee. (In franchise A contract by which a firm (usually a corporation) lets a person or group use its name and sell its goods in exchange for certain payments and requirements. franchiser The entity that offers a franchise. franchisee The person or group that buys a franchise. Section 1 About Business Firms 167 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 168 The Jack in the Box franchise led the way in developing and expanding drive-thru dining. If you were going to open a restaurant, why might you consider becoming part of a franchise operation such as Jack in the Box? 2005 the initial fee for a McDonald’s franchise was $45,000.) (2) The franchisee often pays a royalty, or percentage of the profits, to the franchiser for a number of years. At McDonald’s in 2005, the royalty rate was 12.5 percent. (3) The franchisee usually agrees to meet certain quality standards decided on by the franchiser. (For example, all McDonald’s franchises cook Big Macs for the same length of time.) In return, the franchisee receives from the franchiser the right to use the parent company name, the right to sell a certain product, financial assistance, assistance in training employees and personnel, and national advertising. Advantages and Disadvantages Franchises offer several advantages to franchisees. For many franchisees, national advertising is especially important. Consider how many hours of national TV advertising McDonald’s buys annually. This advertising benefits its franchisees from Maine to California. Furthermore, with a wellestablished company such as McDonald’s or Burger King, the franchisee buys a business that has been proved successful. Consider the risk of starting your own restaurant 168 Chapter 7 Business Operations compared with the risk of opening a McDonald’s or a Burger King. The U.S. Department of Commerce reports that the failure rate is about 12 times higher for independently owned businesses than for franchises. Of course, franchise business arrangements are not always smooth sailing. Sometimes the franchiser fails to provide the financial and training support the franchisee expects, and occasionally the franchisee does not provide the quality of service and product that the franchiser expects. QUESTION: Is the $45,000 fee the only money one needs to open up a McDonald’s? ANSWER: No. A person also needs money to buy goods from the suppliers, to pay a certain amount for the building, and so on. A person needs at least $170,000 (that is not borrowed) to open up a McDonald’s. In total a person needs anywhere from $506,000 to $1.6 million to open a McDonald’s. 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 169 What Is the Ethical and Social Responsibility of Business? Do businesses have an ethical and social responsibility, and if so, what is it? Here are some different views. The Nader View Ralph Nader, the consumer advocate, thinks that businesses do have ethical and social responsibilities. For example, Nader believes that businesses ha...
View Full Document

Ask a homework question - tutors are online