Lesson 04

ENTREPRENEURIAL OPTIONS: START-UP, BUY-OUT

OR FRANCHISING

Introduction

Consider all the options available to you—starting a business, buying an

existing business, or going into a franchise. Choosing the best option can be the
difference between running a business that makes you money or one that costs you
money. This is one of the process involved in the decision making process of an
entrepreneur in a way the he/she must consider if where options can easily enter the
venture and generate a revenue.

Taking charge of your career and income by making an investment in

business is a decision that many think about but hesitate to put into action. The
apprehension is understandable when you consider that this is a major life decision,
and like any investment, it has the potential for great reward but also carries a good
deal of risk. There are also many options as far as entrepreneurial ventures are
concerned. One of the most common decisions entrepreneurs face is whether they
should start up their own business or invest in a franchise. While both opportunities
involve various amounts and types of risk they also hold the potential for individual
benefits as well.

This lesson will discuss the entrepreneurial options on where venture to start
up if for new business format or through a franchising options.

Learning Objectives

At the end of the lesson, the learners should able to:

 interpret the entrepreneurial process and options of setting up business.

 Identify the process of buying an existing business
 analyse the concept of franchising
 illustrate franchising and how this form of business ownership works.
 describe steps entrepreneurs can take to establish a franchise system.
 describe actions and issues associated with the decision to buy a
franchise.

Lesson Proper

A. Creating a New Business

Opening your own business offers you the freedom to make all the decisions
about your company and if you are not fazed by the higher risk for failure then this
could be a great option for you. There can be large rewards when you decide to start
a business but it usually takes much longer to reap these benefits. Most small
business owners have to commit themselves to working well over the average 40
hours a week. This is due to a lack of support and experience. These factors can
also result in costly mistakes that significantly cut down on profits. Most of the time
you won’t be required to pay as much up front for your new business as you would
with a franchise but there are many expenses that need to be taken care of during
the first few years after the business has opened. Whether you decide to go with a
franchise or a new business you will have both negative and positive factors that
come along with them. At the end you must ask yourself what you are willing to risk
and what you would like to gain from your investment.

Longnecker calls the method of establishing a business from scratch as

Startup, which is the route that usually comes to mind when discussing about
entrepreneurship. Most of the entrepreneurs now are starting a new business using
their own concept through creativity and innovation. The market is really diverse and
characterize by intense competition. Uniqueness of starting your own concept and
varieties of products is a must. Also, some entrepreneurs get a feeling of fulfilment in
their autonomy and freedom to run the business.

Other reasons for starting a business from a scratch may also move
entrepreneurs to pursue this options:

1. If the entrepreneur has a newly recently invented or newly developed product

or service.
2. When the entrepreneurs wants to take advantage of ideal location, product or
service, equipment, employees, suppliers, and financial backers.
3. If the entrepreneur wants to avoid problems and undesirable commitments in
policies, contracts, and procedures involving other firms.

Advantages of Creating a New Business

1. Opportunity to orient the business toward your own personal goals.

2. Complete flexibility in selecting your target market.
3. Customize your own policies and procedure and even the employment
selection.
4. Avoid the “goodwill” expense of buying an existing business along with the
possibility of unknown or contingent liabilities.
5. Freedom in choosing the concept of the business.

Disadvantages of Creating a New Business

1. It has the greatest uncertainty about the market demand for your new product
or service.
2. Take time and energy to create an image, build patronage, work the bugs out
of new systems and procedures and reach break-even of sales.
3. Risk in investment
4. There is a significant risk that the time lag between your investment and cash
flow will turn out to be too long.
5. High risk and possibility in failures
6. Lot of uncertainties and lots of uncontrollable factors
B. Buying an Existing Business

A start up entrepreneur may also decide to just acquire an existing business

and he can resort to do any of the following option of his benefits. He may decide to
purchase only the assets or he may buy the business as a whole.
There are reasons why a start-up entrepreneur may prefer to acquire an
already existing business. Some of the reasons that motivated him to do so are
listed:

Why Acquire a Business:

1. There are already available personnel with know-how

2. Facilities and technology are already available
3. There is an existing product with an existing market.
4. The location of the business is favourable.
5. The business has established relationship with banks and trade creditors
6. The business is generating profit
7. The business has an existing goodwill.

FRANCHISING

Franchising is a marketing system based on legal agreement wherein one

party (franchisee or franchiser) is given the right to handle the business as an
independent owner but it is required to abide by the terms and condition
specified by other party (franchisor).

Franchising is a form of business organization in which a firm that already

has a successful product or service (franchisor) licenses its trademark and
method of doing business to another business or individual (franchisee) in
exchange for a franchise fee and an ongoing royalty payment.

FRANCHISE – it is an agreement whereby an independent person is given

exclusive rights to sell a specified good or service.

FRANCHISOR – refers to an entity that owns the franchise name and

distinctive elements (such as patent, trademark, signs and symbols) which
grant others the right to sell its product.

FRANCHISEE or FRANCHISE BUYER – it is the entity that buys to operate

the business using the name, product, trademark, service mark, product and
business format of the franchisor under the terms and conditions of the
franchise contracts.

FRANCHISING CONTRACT – it refers to the legal document involving two

parties (franchisor and franchisee) specifying the obligations, primarily of
franchisee and the condition under which the latter will conduct the business.
Types of Franchising

Generally, franchising is divided into two types: Product and Trademark

Franchising and the Business Format Franchising.

1. Product and Trademark Franchising is an arrangement under which the

franchisor grants to the franchisee the right to buy its products and use its
trade name.

 Franchising involves an arrangement wherein franchisee is given

the right to manufacture and/or distribute a widely recognized brand
or product. There are three types: (1) Manufacturer-Retailer
Franchise, (2) Manufacturer-Wholesaler Franchise, (3) Wholesaler-
Retailers Franchise.

 Manufacturer-Retailer Franchise is a franchise in which the

franchisee buys from the manufacturer (franchisor) and then directly
sells it to the end consumer.

 Manufacturer-Wholesaler Franchise is a franchise in which the

manufacturer (franchisor) sells to the franchisee partially completed
products.

 Wholesalers-Retailer Franchise is a type of franchising in which

the wholesaler is the franchisor that grants the retailer (franchisee)
the right to retail the product but use the wholesaler’s name,
trademark, logo or other identifying marks.

2. Business Format Franchising An arrangement under which the franchisor

provides a formula for doing business to the franchisee along with training,
advertising, and other forms of assistance.

 Is a relationship wherein the franchisee is granted the right to use the

franchisors entire marketing system along with the continuing
assistance and guidance.

Types of Franchise Agreement

1. Individual Franchise Agreement – involves the sale of a single franchise for

a specific location.

Franchisor Franchisee
 2. Area Franchisee Agreement – allows a franchisee to own and operate a
specific number of franchises in a particular geographic area.

Franchisor

Franchisee Franchisee Franchisee

3. Master Franchise Agreement – allows a franchisee to own and operate a

specific number of franchises in a particular geographic area and provides the
franchisee the right to sell to others (subfranchisees) who find and manage
their own franchises.

Franchisor

Franchisee Franchisee Subfranchisee

Franchisee Franchisee Franchisee

Advantages of Franchising

Like any other business, franchising too has its advantages and
disadvantages. Any start up entrepreneur should carefully weigh the options based
on the gains and drawback before making the decision.

1. Possibility of failure is lessened.

2. Increase in new market location through urbanization of local areas.
3. Customer tends to patronize a specific franchised service or product.
4. Customer loyalty and preference for a successful brand name
5. Better management through training provided by franchisor.
 6. Technical and other assistance is easily accessed from the franchisor.
7. It is easier and faster to build good reputation and gain recognition.
8. A better assurance that the business will be profitable.
9. Obtain greater purchasing power.
10. High performance standards.
11. Advertising cost is less.

Disadvantages of Franchising

1. High cost of Franchise

2. Operation is controlled by the Franchisor
3. Presence of fierce competition
4. Pressure to continuously make the product acceptable to the market
5. Problems associated with the expiration of the franchise

What does a Franchise Provide?

The advantages of a franchise over an independent business are aplenty. A

Franchisor must furnish valuable services to its Franchisees. Like other businesses,
franchising also requires commitment. The time, effort, and money that would spend
on franchising would surely merit an investigation by both the franchisee and the
franchisor.

In each factors, the franchisor and franchisee always look into, in the process
of negotiating and finalizing the franchise undertaking. These are the following:

1. Trademark - Franchisee will have his own corporate name as Incorporation

or individual business owner but the franchised business operates under the
Trademark of the Franchisor.

2. Market Studies - Franchisors should know where franchised businesses

should be opened, which locations are good for a Franchisee and which not,
which may be determined generally by location, most important with food
franchises or other aspects, like purchase power of a certain area, etc.

3. System Standards - Sensible and complete specifications, standards and

operating procedures, the so-called system standards, effectively
communicated to Franchisees and readily understandable.

4. Operational Manual - The “How To” documentation of the business operation

and the implementation of the system.

5. Experience - Transfer of business experience is transferred from Franchisor

to Franchisee

6. Wisdom of Franchisor - The Franchisor went through the “labor pain” of

opening the business by himself some time ago. For a new Franchisee that
trial and error period is eliminated.
7. Training - Effective initial training is critical to achieve positive Franchisee
attitudes regarding system standards, the operation, the Franchisor and the
value of the franchise and depending on the business can take from 5 days
up to 6 month.
8. Site Selection Assistance and Approval - Franchisors in the Philippine
usually do not provide locations and prospective Franchisees have to find
them by themselves. However, Franchisors will know where a franchised
business shall be located within a certain area and will inspect the site prior to
the start of construction or operation, if the location is suitable for the
franchised business.

9. Store lay out - Franchisors will provide lay out assistance and supervise the
construction of a new franchised store. The entire construction cost is at the
expense of the Franchisee, and has to be paid as due to either the Contractor
or Franchisor, depending on the arrangement.

10. Exclusive Territory - Most Franchisor will award new franchises with an
exclusive Territory, which depends on the kind of business can be a certain
radius in meters or a floor in a mall, a whole City or a whole province or City
or several of them as Area franchise or even a whole Country as Master
franchise.

11. Procurement Programs - Franchisor will provide a listing of authorized

suppliers for equipment’s, goods, materials and services.

12. Opening assistance - Franchisor assistance in hiring personnel for the

Franchisee by giving the guidelines for needed staffing and training them, and
set-up of the franchised outlet. Franchisor’s management and staff assist new
Franchisee upon opening of the franchised outlet to operate it smoothly from
day one onwards. Franchisors representative will remain in the Franchised
Facility for a period of time as determined by Franchisor to assist Franchisee
in the initial operation phase.

13. Marketing Strategies - Franchisee may have to contribute to a National

Advertisement Fund, a Co-op Advertisement and spend some amount for the
initial Opening Advertisement and the ongoing Local Store Marketing
activities.

14. Effective Field Service - Operational support is needed by Franchisees for

occasional questions and problems. Knowledgeable and well-trained
personnel with positive attitudes and a willingness to help Franchisees are
provided by Franchisors. Franchisors shall also be available to Franchisee via
phone, email, fax or text for urgent problems arising from the operation of the
franchised business. Important is also that Franchisor and his representative
regularly visit the franchised outlets.

15. Research and Development - Businesses face tough competition and new
products are constantly to be tested and introduced in the market. The job is
with the Franchisor in development of new products and service,
 improvements of equipment’s, formats, operating efficiency and trying to beat
competitor.

Nine Steps in Setting up a Franchise System

STEP 3
STEP 1 STEP 2
Conduct an
Develop a Franchise Get Professional
Intellectual Property
System Advise
Audit

STEP 6
Plan an advertising STEP 5 STEP 4
strategy and a Prepare Operating Develop Franchise
franchisee-training Manuals Document
program

STEP 8 STEP 9
STEP 7
Plan a strategy for Help Franchises with
Put together a team
solicitating site selection and the
for opening new
prospective grand opening of
franchise units
franchises franchise outlets.

Qualities to Look for in Possible Franchisees

1. Good work ethic.

2. Ability to follow instructions.
3. Ability to operate with minimal supervision.
4. Team oriented.
5. Experience in the industry in which the franchise competes.
6. Adequate financial resources and good credit history.
7. Ability to make suggestions without becoming confrontational or upset if the
suggestions are not adopted.
8. Represents the franchisor in a positive manner.

Ways Franchisors Can Develop the Potential of Their Franchisees

1. Provide mentoring that supersedes routine training.

2. Keep operating manuals up-to-date.
3. Keep products, services, and business systems up to date.
4. Solicit input from franchisees to reinforce their importance in the larger
system.
 5. Encourage franchisees to develop a franchise association.
6. Maintain the franchise system’s integrity.

Choosing a Franchise

There are many reasons why an entrepreneur may decide to go into business
by acquiring a franchise.

1. Earning depends on the effort

2. Opportunities for unlimited income
3. Personal satisfaction
4. Tax benefits
5. Freedom to pursue the job you want
6. Assurance of continuous employment
7. Eliminated difficulties in starting up
8. Ease in operationalizing business plan
9. Benefits of having a established system
10. Benefits from quality research and development
11. Quicker start-up
12. Probability of success is high

Considerations in Selecting Franchises

The prospective franchisee should take the initiative to investigate the

franchise. The entrepreneur must study the franchise well before buying. In
evaluating franchise to acquire, the following points are important to consider:

1. Cost of investment

a. Initial Franchise Fee – the initial fees varies depending on the

franchisor.

b. Capital Requirements - The costs vary but may include the cost of
buying real estate, the cost of putting up a building, the purchase of
inventory, and the cost of obtaining a business license.

c. Royalties – this is the amount paid to the franchisor periodically.

Usually, royalties are per year basis at 5% to 15% of monthly gross
income.

d. Advertising Fee - Franchisees are often required to pay into a national

or regional advertising fund.
 e. Other Fees

 Other fees may be charged for various activities, including:

 Training additional staff.
 Providing management expertise when needed.
 Providing computer assistance.
 Providing a host of other items or support services.
2. Franchisee’s preference and interest
3. Location of the franchise
4. Reputation of the franchise organization
5. Franchise support and assistance
6. Possibility of obtaining a master franchise

Seven Steps in Purchasing a Franchise

Sample Franchising Package

Self-Progress Test/Activity

 Guide Questions – 30 POINTS

TOTAL 30 POINTS

A. Guide Questions (Short Essay) 30 POINTS

Direction:
Choose 3 Questions Only
Answer each questions through short essay (for 3 sentences only)
Answer in the 1 sheet of paper or through MS Word
Each question is equivalent to 10 POINTS. Check the Rubrics below
Guide Question Rubrics

Rubrics for Short Essay

 FEATURES 10 POINTS 7 POINTS 5 POINTS 3 POINTS
1. Outstanding 1. Satisfactory 1. Good construction 1. Poor construction of
construction of ideas construction of ideas. of ideas ideas.
2. The Piece was 2. The piece w written 2. The piece has little 2. Piece had no style
Concept
written in an in an extraordinary style. 3. Gives no new
Quality of
extraordinary style style. 3. Give some new information and very
Writing
3. Very informative 3. Somewhat information but poorly poorly organize.
and well organize. informative and well organized.
organize.
1. Virtually no spelling, 1. Few spelling and 1. A number of 1. So many spelling,
Grammar, punctuation or punctuation errors, spelling, punctuation punctutation, and
Usage& grammatical errors minor grammatical or grammatical errors grammatical errors
Mechanics errors that it interferes with
the meaning.

Questions

1. Would you prefer to start and organize an entirely new business than buy an
existing firm? Discuss.
2. What are the advantages and pitfalls of Franchising?
3. What are the two types of Franchising? explain
4. What are the different format of franchising? Explain
5. What are the cost implicated in entering a franchising venture?

Summary of the Lesson

Opening your own business offers you the freedom to make all the
decisions about your company and if you are not fazed by the higher risk
for failure then this could be a great option for you.

A start up entrepreneur may also decide to just acquire an existing

business and he can resort to do any of the following option of his benefits.
He may decide to purchase only the assets or he may buy the business as
a whole.

Franchising is a marketing system based on legal agreement wherein

one party (franchisee or franchiser) is given the right to handle the
business as an independent owner but it is required to abide by the terms
and condition specified by other party (franchisor).

There are two types of franchising such Product and Trademark

Franchising is an arrangement under which the franchisor grants to the
franchisee the right to buy its products and use its trade name. And lastly
is Business Format Franchising an arrangement under which the
franchisor provides a formula for doing business to the franchisee along
with training, advertising, and other forms of assistance.

There are different type of Franchising such as Individual Franchise

Format, Area Franchise Format, and Master Franchise Format.
Supplementary Readings/Materials

https://www.youtube.com/watch?v=5ANSoH2CC3E
https://www.youtube.com/watch?v=FZ96Y7BH61I

References

Books
Bajao, Grayfield D.; Osorno, Rene D 2020 Entrepreneurship in Tourism and
Hospitality Wiseman’s Books Trading, Inc.

Camposano, Jorge A. 2008 Entrepreneurship for Modern Business National

Bookstore

Lashley, Conrad; Ross, Darren Lee 2009 Entrepreneurship and Small Business
Management in Hospitality Industry Elsevier LTD.

Internet Sources

https://business.inquirer.net/273445/eight-successful-filipino-entrepreneurs-who-
started-small
https://courses.lumenlearning.com/wmopen-introbusiness/chapter/entrepreneurs-2/
https://www.tutorialspoint.com/entrepreneurship_development/mind_vs_money.htm