Mind Your Business - 17 November 2008
Franchises - Major League Baseball
Each team in MLB is a franchise. The term franchise can refer to a variety of different types of business relationship, for example, licensing, arrangements for distribution, agency agreements, etc., but is more popularly associated with the opportunity to buy a business 'off the peg' as opposed to the greater risks involved in setting up a completely new business enterprise.
A franchise involves two parties. The franchisee buys the right to use the trademark or trade name of the franchisor - the business that owns the right to use that trademark or name. The trademark/name is generally associated with an already successful business model, and the franchisee is therefore buying into that model. In so doing they are able to take advantage of the established nature of the business name in order to reduce the risks of operating whilst at the same time carry out business - they can run their own business with the finance and experience of the franchisor behind them.
Franchising has become an increasingly important way of businesses expanding their brand as well as helping individuals take the often scary step into running their own business. In the UK there are around 371,600 people involved in franchised business activities. There are currently 781 franchise systems operating in the UK. (Data source: NatWest/British Franchise Association Survey, 2007).
The franchisee puts up a sum of money to buy the right to trade under the franchisor's name. Some franchises will also have an arrangement where the franchisee pays an annual fee for various services provided by the franchisor, such as training and equipment supplies, and may also involve the payment of a proportion of the annual profits or turnover generated by the business.
The franchisor, apart from granting the right of the franchisee to use the tradename, also provides a range of different services including training but also equipment, for example, point-of-sale display stands, logos, advertising packages, fittings, etc.
The franchisor has an overall say in the marketing of products and over quality control processes but other than that the franchisee is on their own and free to conduct their business as they see fit. The relationship between the two parties is therefore vital to the success of the franchise. In the UK many of the popular high street names are franchises, most notably McDonald's, Prontaprint, Domino's Pizza, Cash Generator, Kall-Kwik, Timpsons, Lasertech, Interlink, Toni & Guy and Drain Doctor, amongst others. The average investment needed to launch a franchise concept in the UK is £166,000, and the average amount borrowed to finance a franchise is £40,000 (Data source: Nat West/British Franchise Association Survey, 2006). In the United States, the cost of buying into a baseball franchise might be a little more expensive.
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