CHAPTER 4

FORMS OF BUSINESS OWNERSHIP AND

FRANCHISING
Learning Objective
 Explain the advantages and the disadvantages of the three
major forms of business ownership: sole proprietorship,
the partnership, and the corporation.
 Discuss the advantages and disadvantages of the S
corporation, the limited liability company, the professional
corporation, and joint venture.
 Describe the three types of franchising, trade name ,
product distribution, and pure.
 Explain benefits and the drawbacks of buying a franchise.
 Discuss right way to buy franchising.
 Outline major trends shaping franchising.
LEARNING OBJECTIVE # 1

Seven critical consideration to

select the form of ownership
1. Tax Consideration
2. Liability Exposure
3. Start up capital exposure
4. Control
5. Business goal
6. Management succession plans
7. Cost of formation
Explain the advantages and disadvantages of sole proprietorship.

 Sole mean “single” and proprietorship means”

ownership”.
 A business which is owned and control(managed) by

a single person is called sole proprietorship.

 In U.S sole proprietorship 73 % of all U.S business.
 Advantages  Disadvantages
 Ease of formation
 Lack of financial
 Minimum legal
resources
formalities  Management
 Entire profits
problem
 Freedom of action
 Unlimited liability
 Quick decisions
 No legal separate
 Flexibility of

operations entity
 Short life
 Secrecy
 Closer contact with 

customer
 Easy dissolution
 personal income tax 
 Partnership
 Partnership Act 1932
 Partnership is relationship between two or more

persons who have agreed to share the profit of

business carried by all or any one of them acting for
all.
 Association of person
 Minimum 2 maximum 20
 In banking partnership 2-10
 Partnership agreement ( Deed)
 JOINT VENTURE
 Two companies come together “temporarily” for mutual
gains for a particular project/job. After the completion of
project joint venture is dissolved.
 A Joint Venture is a legal organization that takes the
form of a short term partnership in which the persons
jointly undertake a transaction for mutual profit.
Generally each person contributes assets and share risks.
Like a partnership, joint ventures can involve any type of
business transaction and the "Persons" involved can be
Individuals, Groups of Individuals, Companies or
Corporations.
 Joint Venture

 Combining complementary R & D technologies

 Efficient commercialization of a technology or business concept
 Developing or acquiring marketing or distribution expertise
 Sharing of professionals with unique skills
 Financial support or sharing of economic risk
 Acceleration of revenue growth
 Ability to increase profit margins
 Expansion to new domestic markets
 New product development
Benefits of Joint Ventures
Businesses of any size can use joint ventures to strengthen long-term
relationships or to collaborate on short-term projects.

A successful joint venture can offer:

 access to new markets and distribution networks

 increased capacity

 sharing of risks and costs with a partner

 access to greater resources, including specialized staff, technology and

finance

 A joint venture can also be very flexible. For example, a joint venture can
have a limited life span and only cover part of what you do, thus limiting the
commitment for both parties and the business' exposure.

 Joint ventures are especially popular with businesses in the transport and
travel industries that operate in different countries.
Risks of Joint Ventures
Partnering with another business can be complex. It takes time and effort to
build the right relationship. Problems are likely to arise if:

 the objectives of the venture are not 100 per cent clear and communicated to
everyone involved

 the partners have different objectives for the joint venture

 there is an imbalance in levels of expertise, investment or assets brought into

the venture by the different partners

 different cultures and management styles result in poor integration and co-
operation

 the partners don't provide sufficient leadership and support in the early
stages

 Success in a joint venture depends on thorough research and analysis of aims

and objectives. This should be followed up with effective communication of
the business plan to everyone involved.
Example of a Joint Venture
 Indus Motor Company Ltd.
 Indus Motor Company is a joint venture of the House of
Habib, Toyota Motor Corporation and Toyota Tsusho
Corporation.

 It manufactures and markets Toyota and Daihatsu vehicles in

Pakistan.

 This is one of the few Toyota manufacturing sites in the

world that manufactures both Toyota and Daihatsu vehicles
on the same production line.
 Indus Motor Company Ltd.
 Indus Motor Company, with support from Toyota Motor
Corporation has worked closely with its 62 local vendors for
increased localization and technology transfer.

 Pakistan is the highest producer of Corolla in Asia. At the

time of the Corolla launch in March 2002, the company was
producing 57 vehicles per day. Today, it produces 200
vehicles per day.

 Indus Motor has undertaken a number of expansion projects

which include an in-house press plant for making car body
parts, a cogeneration power plant to optimize energy
consumption etc. which is a part of long term technology
transfer strategy.
 PSO and Pizza Hut’s Joint Venture

 Pakistan State Oil and Pizza Hut‘s joint venture.

 Pizza Hut and Pakistan state Oil (PSO) jointly

decided to open Pizza Hut branch on every PSO
petrol pump all over the Pakistan. The first shop is
opened at the PSO branch of Lahore Cantt.

 As per MD PSO Mr. Muhammad Jalees, it is the

proof of quality service of PSO that Pizza Hut
decided to make a Joint venture with them.
What is Franchising?
 A system of distribution in which semi independent business
owners( franchisee) pay fees and royalties to patent
company( franchise) in return for the right to become
identified with its trademark, to sells its products, or services,
and often to use its business format and system.
  In simple terms it is the granting of certain rights by one
party (the Franchisor) to another (the Franchisee) in return
for a sum of money. The franchisee then exercises those
rights under the guidance of the franchisor. Franchising is a
business arrangement where a franchisor sells a business
idea and methodology or a "franchise business" to a
franchisee, who operates the business under the franchisor's
name. The franchisee is authorized to use and market goods
or services under the franchisor's trademarks, service marks,
and trade names for a specific length of time.
 History of Franchising

Singer Sewing Machine

McDonald’s

Automobile Industry
 Franchising has gained tremendous growth in
Pakistan during the last decade. Well-known names
like McDonald’s, Subway, Papa John’s, Domino’s,
Burger King, Dunkin Donuts, Kentucky Fried Chicken,
 Hardee’s, Nandos, Pizza Hut and many more have
become household names. Most of the growth in the
franchise industry during past few decades have taken
place in the food business, where the present market
size for internationally franchised outlets is estimated
more than PKR 1.2 billion (USD approximately 24
million) in terms of annual sales (Source:
World Franchise Associates).
 RETAIL & CLOTHING FRANCHISE BUSINESS
 
 Retail and clothing franchise businesses are also
high in popularity in Pakistan. Some of eminent
names are Nike, Levi’s, The Body Shop, Toni &
Guy, Next, Adidas, etc.

 Pakistani clothing brands Khaadi, Gul Ahmed,

Bonanza Garment Industries Pvt and Deepak
Perwani are planning to set up franchises in
India since trade between the two countries is
increasing (NY Daily News, 2012).
 In the current era its almost impossible to find a town
or village that does not have a franchise business of
some type.
 Today approximately 4500 franchisers operate more
than 600,000 franchise outlets throughout the world.
 Franchises account for 44 % sales of all retail sales,
totaling more than $ 1 trillion, and they employ some 8
million people in more than 100 major industries.
 Entrepreneur pays royalty or fees to franchisor to use
its products and services, and to use its business format
and system.
 Entrepreneurs buy success package from the
franchisor.
 Franchising is based on continuing relationship
between a franchisor and franchisee.
 Franchiser provide valuable services such as market

research, business system, name recognition.

 Franchisee pay an initial franchise fee
 As well as on going percentage of sales to franchiser.
 They operate business according to the requirement of

franchiser.
 Types of franchising
Trade name franchising
A system of franchising in which a franchisee purchase
right to use the franchisor’s trade name without distributing
particular products under the franchiser’s name.
e.g. True Value Hardware or Western Auto
Product distribution franchising
A system of franchising in which franchiser licenses a
franchisee to sells its product under the franchiser’s name
and trademark through a selective and limited distribution
network.
PRODUCT DISTRIBUTION FRANCHISES
PRODUCT DISTRIBUTION
FRANCHISES

Produces the syrup

concentrate

Sells the syrup

concentrate

Produces the final

FRANCHISEE drink

Retail Stores
Restaurants & Vending
F&B Outlets Machine
Operators
BUSINESS FORMAT /PURE FRANCHISING

 A system of franchising in which a franchiser sells a

franchisee complete business format and system.
 In a business format franchise, the integration of the
business is more complete.

 The franchisee not only distributes the franchisor’s

products and services under the franchisor’s trade
mark, but also implements the franchisor’s format
and procedure of conducting the business.
 Its also known as pure, comprehensive or business format .
 Franchiser provide complete business format
 Name, trade name
 products and services
 Physical plant
 Method of operations
 Marketing strategies
 Strategic plans
 Quality control processes
 Communication services
 Rapidly growing of among all type of franchising
Famous Examples
 BUSINESS FORMAT FRANCHISING -

outlet in outlet in
Sale, Australia Marseille, France
THE BENEFITS OF BUYING FRANCHISE
 A franchisee gets the opportunity to own a small
business relatively quickly.
 Established product and brand name
 Reach breakeven point faster
 Many entrepreneurs go into business by themselves

and make costly mistake.

 Already developed systems
Management training and support
 Leading cause of failure of business is incompetent

management.
 Managerial training program for franchisee prior to

opening a new outlet.

 Follow up training and counseling services.

 Help in day to day operation

 Training program often involve both class room and

on-site training.
 Before beginning operations McDonald’s franchisees

spend 14 days training at Hamburg university.

 Despites of the positive features of training

 Assistance to control

 Training fees.
 BRAND NAME APPEAL
 Licensed franchised purchase right to use nationally known
and advertised brand name for a product and service.
 Franchisee have advantage of
 Widely recognized brand
 Trademarks
 Standard symbols
 Store design
 Established product
 Established franchiser’s success
 Every one is familiar with McDonald standard products and
quality offered at each.
 Customer is confident that quality and content of meal
offered at McDonald in Lahore or Islamabad will be
consistent with international.
 Positive brand reputation
STANDARDIZE QULAITY IN GOODS AND SERVICES

 Quality of products and services determine the reputation

 So reputation in business is not achieved quickly.
 Destroying a good reputation takes no time at all.
 If Franchisees are allowed to operate at substandard levels :
 Image of entire chain food suffer
 That’s why franchiser demand :
 Compliance with uniform standards of quality and service throughout the
entire chain
 Periodical inspections
 Franchiser have right to repurchase franchise contract if
franchisee fails to comply with established standards.
 Financial Assistance
 Franchiser rely on franchisee's money to grow their
business.
 Franchiser rarely help franchisee and make loans to

enable franchisee to pay initial fee.

 May be direct financial assistance in specific area such

as purchasing equipment , inventory, and even

franchise fee.
 Proven products and business formats
 Franchiser experience, expertise, and products.
 Franchisee depends on methods and techniques of an

established business.
 Standardized procedures and operations enhance the

chances of success for franchisee.

 Centralized buying power
 Not all franchisor offer centralized buying but some
franchisor offering centralized buying to franchisee
that will benefits:
 large scale buying
 Cost saving
 Quantity discount
Site selection and Territorial protection
 Proper location is critical to success of Small business
 Prime locations
 Reaching traffic patterns
 Accessibility
 Population density
 demographic
 Franchiser usually reserve the right of approving the
final site of franchisee.
 Territorial protection franchisor give right or protection

to franchisee to distribute the good and services in a

particular geographic area.
Greater Chance for successful
 Investing in franchise is not risk free.
 Available statistics shows success rate of franchises

business starts ups are more than non franchise

business.
DRAW BACKS OF BUYING A FRANCHISE
STRICT ADHERENCE TO STANDARDIZE OPERATIONS
 franchisee own franchise but not independent owner.

 Franchiser required to maintained to certain operating standards.

 If franchisee fail to maintain minimum standards the franchisor may

terminate the license.

 Periodic inspection

 Strict adherence to standards become burden to franchisee

 Written reports that’s franchisor demands take time (time consuming)

Franchise fee and profit sharing
 Initial fee
 Percentage of sales
 Additional fees
 Training cost
 Management assistance etc
 Restriction on Purchasing
 For maintenance of quality standards, franchisor
required to purchase products, special equipment's, and
other items from an approved supplier.
 KFC
 Poor image may result if franchisee use inferior quality

products.
 Limited product line
 In most of cases franchise agreement stipulate that
franchises can sell only those products approved by the
franchiser.
 Due to license cancellation risk franchisee sells limited

approved products.
 unsatisfactory training program
 Market saturation
 Less freedom