Principles of Business Business Organisations Note#7

(1) Franchises
A franchise is not strictly a form of legal structure for a business, but it is a legal contract between
two firms. It may be defined as a system whereby an already established business (the franchisor)
enters into a contractual arrangement with semi-independent business owner(s) (the franchisee) to
operate under the franchisor’s trade name. Examples:- Burger King, Kentucky Fried Chicken
(KFC), McDonalds, Pizza Hut

This arrangement usually involves a fee and royalties being paid to the franchisor. The contract
allows the franchisee to use the name, logo and marketing methods of the franchiser. The
franchisee can, independently, then decide which form of legal structure to adopt. A franchise
arrangement may take any of the forms:
● Pure franchise – this type of franchise sells the franchisee the complete business format
and system.
● Product distribution (dealer franchise) – the franchisee is given a licence to sell products
under the franchisor’s name and trade mark through a selective and limited distribution
network.
● Trade name franchise – the franchisee purchases the right to use the franchisor’s trade
name.

Advantages
● The franchisor receives management
training and support
● Availability of financial assistance to the
franchisee
● Fewer chances of new business failing as
an established brand and products are
being used.
● The franchisee will benefit from
advertisement made by the franchisor
● Supplies are obtained from established
and quality checked suppliers
● The product and business formats are
tested and proven.
Disadvantages
● The franchisee must pay a fee and
royalties to the franchisor
● There must be strict adherence to the
standards outlined by the franchisor
● The franchisee may not be able to deviate
from the product line of the franchisor.
● Market saturation may lead to failure of
the business.

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Principles of Business Business Organisations Note#7

(2) Joint Ventures

This is a business that is jointly owned by two or more parties or firms in order to undertake an
economic activity. Both parties continue their original operations separately, but pool their
resources to carry out the purpose of the venture. There should be an agreement to contribute
capital to the entity and to share revenues, expenses and the control of the business. Joint venture
is similar to a partnership, however it is usually formed for a short time with a limited or specific
purpose.

Similar to a partnership, the joint venture should draft a written agreement, including but not limited to
the following:
● Objectives of the venture
● Parties involved in the venture
● Amount of funding each party will contribute
● Responsibility of each party
● Management of the venture.

Reasons for entering in a joint venture:

(i) Fostering expansion by utilizing another company’s resources
(ii) To make use of other firms’ established distribution channels and dealership
(iii) Diversification of product line
(iv) To gain access to advanced technology and expertise
(v) To share costs and risk involved with the establishment of the venture

Advantages Disadvantages
● Parties share assets which leads to fixed
costs being spread over production,
therefore lowering costs of production
● Foster specialization since labour and
management are shared between parties
● Easily dissolved
● There is a greater access to resources,
including technology
● Firms benefits from expansion
● Parties may have disagreements
● Differences in culture and strategies may
lead to poor integration
● Decision-making process may be long and
tedious
● Loss of independence

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