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Franchisees can thus benefit from the selling corporation’s experience and expertise.
They can also consult the franchiser for managerial and financial help.
For example, the franchiser may supply financing. It may pick the store location,
negotiate the lease, design the store, and purchase necessary equipment. It may train
the first set of employees and managers and provide standardized policies and proce-
dures. Once the business is open, the franchiser may offer franchisees savings by allow-
ing them to purchase from a central location. Marketing strategy (especially advertising)
may also be handled by the franchiser. Finally, franchisees may benefit from continued
management counseling. In short, franchisees receive—that is, invest in—not only their
own ready-made business but also expert help in running it.
Franchises offer many advantages to both sellers and buyers. For example, franchisers
benefit from the ability to grow rapidly by using the investment money provided by
franchisees. This strategy has enabled giant franchisers such as McDonald’s and Subway
to mushroom into billion-dollar concerns in a brief time.
For the franchisee, the arrangement combines the incentive of owning a business with
the advantage of access to big-business management skills. Unlike the person who starts
from scratch, the franchisee does not have to build a business step by step. Instead, the
business is established virtually overnight. Moreover, because each franchise outlet is
probably a carbon copy of every other outlet, the chances of failure are reduced.
McDonald’s, for example, is a model of consistency—Big Macs taste the same everywhere.
Of course, owning a franchise also involves certain disadvantages. Perhaps the most
significant is the start-up cost. Franchise prices vary widely. Fantastic Sams hair salon
franchise fees are $25,000 to $30,000. Extremely profitable or hard-to-get franchises are
much more expensive, though. A McDonald’s franchise costs a minimum of $500,000
plus the cost of building and outfitting a new restaurant (estimated to be between
$1 million and $1 8 million), and a professional sports team can cost several hundred
million dollars. Franchisees may also have continued obligations to contribute percen-
tages of sales to the parent corporation.
Buying a franchise also entails less tangible costs. For one thing, the small-business
owner sacrifices some independence. A McDonald’s franchisee cannot change the way
its hamburgers or milkshakes are made. Nor can franchisees create an individual identity
in their community; for all practical purposes, the McDonald’s owner is anonymous. In
addition, many franchise agreements are difficult to terminate.
Finally, although franchises minimize risks, they do not guarantee success. Many franchi-
sees have seen their investments—and their dreams—disappear because of poor location, ris-
ing costs, or lack of continued franchiser commitment. Moreover, figures on failure rates are
artificially low because they do not include failing franchisees bought out by their franchising
parent companies. An additional risk is that the chain itself could collapse. In any given year,
dozens—sometimes hundreds—of franchisers close shop or stop selling franchises.
THE PERFORMANCE OF ENTREPRENEURIAL
ORGANIZATIONS
The formulation and implementation of an effective strategy play major roles in deter-
mining the overall performance of an entrepreneurial organization. This section exam-
ines how entrepreneurial firms evolve over time and the attributes of these firms that
enhance their chances of success. For every Henry Ford, Walt Disney, Mary Kay Ash,
or Bill Gates—people who transformed small businesses into major corporations—there
are many small-business owners and entrepreneurs who fail.
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