How to Set-Up an Enterprise
Choosing your form of Business Organisation
- Choosing your form of Business Organisation
- Permanent Registration of the unit in the concerned State /Union Territory
- Documents required for registration on a provisional basis
Many first time entrepreneurs do not have a clear perspective of the issues, legal or otherwise, involved in choosing one or the other form of a business. This often results in avoidable mistakes, which later cost time and money to rectify. The options of the form of business with their pros and cons have been explained below. In India setting up a private limited company was the most popular choice among our sample of entrepreneurs.
Franchising is also emerging as a major business format. An extensive overview of its features is provided since it is believed that it will grow the same way in India as it has abroad.
Throughout in most of the parts of world, three main types of legal forms are used predominantly to run small business organisations. These forms are as follows :
- Sole proprietorship where generally only one person funds the business activities.
- Partnerships, where two or more people band together to finance or run a venture.
- Corporations/limited companies where it is possible for many thousands to subscribe for a share in business ownership and, in theory at least, in its governance and direction.
The co-operative is a fourth and minority legal form, which nevertheless has a part to play in the small business world in some countries.
The vast majority of new businesses set up each year in Indian choose to do so as sole proprietors. The form has the merit of being relatively formality-free; there are no rules about the records you have to keep. Nor is there a requirement for your accounts to be audited, or for financial information on your business to be filed at the registrar of companies.
As a sole proprietor, there is no legal distinction between you and your business-your business is one of your assets, just as your house or car is. It follows from this that if your business should fail your creditors have a right not only to the assets of the business, but also to your personal assets, subject only to the provisions of the bankruptcy Act (these allow you to keep only a few absolutely basic essential for yourself and family).
It is possible to avoid the worst of these consequences by ensuring that your private assets are the legal property of your spouse, against whom your creditors have no claim. (You must be solvent when the transfer is made, and that transfer must have been made at least two years prior to your business running into trouble.) However, to be effective such a transfer must be absolute and you can have no say in how your spouse chooses to dispose of his or her new-found wealth!
The capital to get the business going must come from either you or from loans. There is no access to equity capital, which has the attraction of being risk free. In return for these drawbacks you can have the pleasure of being your own boss immediately, subject only to declaring your profits on your tax return. (In practice you would be wise to take professional advice before doing so.)
Although there is nothing you are required to do legally as a sole proprietor, it is sensible to do the following :
- Open separate bank accounts for the business. Do not pay for business expenses from personal accounts. Also, withdraw your personal expenses regularly from the business accounts.
- Get your accountant to give you some indication of allowable business expenses.
- Take out full insurance cover against possible loss or damage to any equipment-if you have invested in any.
- Take out personal injury/illness insurance.
The advantages and disadvantages of being a sole proprietor are as follows :
- Easy to set up-you can start the business in a small way, from your home if you want to.
- You are the boss. You can run the business at your own pace and in your own way.
- Your keep the profits.
- You can offset some business expenses against earnings for tax purposes.
- No public disclosure of your affairs.
- Profit or loss in one trade can be set off against profit and loss in any other business your run.
- You are totally responsible for any debts your business incurs. If you go bankrupt, your creditors are entitled to size and sell your possessions-personal as well as business.
- It can be lonely.
- You have a low status.
Most countries have sole proprietorship as a legal structure in the way described here. Some countries have variations on the same theme. For example, in France where nearly 70 per cent of all active businesses are operated as sole trader ships, husbands and wives may be jointly responsible. In the United Kingdom husbands and wives would need to form either a partnership or a limited company to share the `ownership' of a venture.
Partnerships are effectively collections of sole proprietors and, as such, the legal problems attached to personal liability. There are very few restrictions to setting up in business with another person (or persons) in partnership, and several definite advantages. By pooling resources you may have more capital; you will be bringing, it is to be hoped, several sets of skills to the business; and if you are ill the business can still carry on.
There are two serious drawbacks that merit particular attention. First, if your partner makes a business mistake, perhaps by signing a disastrous contract, without your knowledge or consent, every member of the partnership must shoulder the consequences. Under these circumstances your personal assets could be taken to pay the creditors even though the mistake was no fault of your own.
Second, if your partner goes bankrupt in his personal capacity, for whatever reason, his or her share of the partnership can be seized by his creditors. As a private individual you are not liable for your partner's private debts, but having to buy him or her out of the partnership at short notice could put you and the business in financial jeopardy. Even death may not release you from partnership obligations and in some circumstances your estate can remain liable. Unless you take `public' leave of your partnership by notifying your business contacts, and advertising your retirement, you will remain liable indefinitely.
The legal regulations governing this field are set out in the Act, which in essence assumes that competent businessmen and women should know what they are doing. The Act merely provides a framework of agreement, which applies `in the absence of agreement to the contrary'. It follows from this that many partnerships are entered into without legal formalities-and sometimes without the parties themselves being aware that they have entered a partnership!
The main provisions of the partnership Act are as follows :
- All partners contribute capital equally.
- All partners share profits and losses equally.
- No partner shall have interest paid on his or her capital.
- No partner shall be paid a salary.
- All partners have an equal say in the management of the business.
It is unlikely that all these provisions will suit you so you would be well advised to get a `partnership agreement' drawn up in writing by a solicitor at the outset of your venture.
Why you Might Consider a Partnership.
- As a means of starting up with increased capital (presuming both you and partners put money in.)
- You might not feel confident to start a business entirely on your own and would prefer to share the responsibilities with someone else.
- You have complementary skills-one of you may have specialist skills and the other management flair, or one the money, the other the ideas.
Choosing a Partner
If the business is going to have any chance of success, if is essential that the partners trust each other and can work together harmoniously. Also, since you and your partner(s) have unlimited financial liability for the firm, if things go wrong regardless of whose fault it is-creditors can claim the personal possessions of each and every partner. A partnership is therefore almost as close a relationship as a marriage. So the choice of partner must be made with as much care as selecting a wife or husband!
If you are considering a partnership, ask yourself first if you have the right temperament to be a partner. Some people are too independent to be able to cope with pooling their ideas and resources on an equal footing, as the case that follows illustrates.
Mr. Dave opted out of the highly successful computer business he had painstakingly set up and nurtured for seven years within a year of taking a partner. He took the partner because he needed additional capital for expansion but he couldn't tolerate what he saw as the partner's `interference' with the way the business was run. He now admits-with hindsight-that the partner was perfectly entitled to express his views on what had, after all, become a joint project. Mr. Dave agrees that his personality was the problem. `I' am better off on my,' he admits.
There are no hard-and-fast rules about selecting a partner, but the most successful partnerships do seem to be those where the partners have known each other for some time-either as friends or business associates-and where they have complementary skills and personalities. For instance, one partner may be a technical person who looks after the manufacturing side of the operation while the other is good at dealing with people and looks after sales, or the combination may be of an ideas person with a down-to-earth sort of person who can implement the ideas. Matching entrepreneurial skills also helps in selecting a partner.
As already stated, the provisions of the partnership Act apply if there is no other agreement between the partners, but it is sensible, if not essential, to get a solicitor to draw up a deed of partnership between you and your partners. You may want to vary the rules laid down in the 'partnership Act and to cover points not mentioned. This documents also regulates exactly how the business is run. It should cover the points listed below.
- Profit Sharing: How profits and losses are to the divided. If, for example, one partner has sunk more capital into the business than the other, profits won't be shared in equal proportions; or you might decide to distribute profits according to the number of contracts completed, the number of hours worked, or by some other methods.
- Withdrawing Money: It is important to limit the amount of money each partner can take out of the business each month, otherwise you may find you have insufficient working capital.
- Time off: The length and frequency of holidays should be laid down, as well as what rules apply if a partner is incapacitated through illness. The partner will be entitled to a share of the profits, so you may consider it important to stipulate a time limit after which the partnership can be dissolved.
- Duration of Partnership: How long do you want your partnership to last-one, three, five or ten years? Or you might prefer it to be for an indefinite period, terminating after, say, three months' notice.
- Admitting or Expelling a Partner: The consent of every partner is necessary before a new partner can be admitted. If you want the right to have a relative, say your wife, admitted as a partner later, this should be stated in the agreement. Unless the agreement states otherwise, you must get a court order if you want to expel a partner, so the partnership deed should set out in detail the circumstances in which a partner can be expelled.
- Dissolving or Rescinding The Partnership: Dissolution will occur automatically on the death or bankruptcy of a partner-unless the partnership agreement provides otherwise. If you discover your partner has given you false information you may apply to the court to rescind the partnership agreement.
- Getting Capital Out: When dissolution occurs, a partner is entitled to have the partnership property sold and all assets distributed. After the assets have been realised and outstanding debts paid, any surplus must be distributed among the partners in equal shares-unless you make a different arrangement in the partnership deed.
The proceeds from the sale of assets must be applies in the following order, although, again, the partnership deed can vary this;
- Payment of creditors who are not partners
- repaying loans made by the partners
- paying back partners their capital contribution
- surplus divided among partners.
If there aren't enough assets partners must make up the deficiency in the proportions in which they shared profits.
- Notice of Withdrawal From A Partnership: The agreement should state how much notice should be given to each of the other partners if one partner wants to withdraw. Remember, if you are withdrawing, that you are still responsible for all obligations, which your firm incurred while you were a partner. Give notice to all customers and suppliers that you are withdrawing and make sure your name is removed from the stationery. Advertise the fact in the newspaper.
- Conflicting Interests: Partners are free to engage in other business activities unless the partnership agreement prohibits this. However, no partner may engage in any activity, which competes with the partnership business. It might be sensible to provide for limited partnerships.
Limited Liability Companies
As the name suggests, in this forms of business your liability is limited to the amount you contribute by way of share capital.
A company registered in accordance with the companies Act is a separate legal entity, distinct from both its shareholders, directors and managers. The liability of the shareholders is limited to the amount paid or unpaid on issued share capital. A company has unlimited life and no limit is placed on the number of shareholders. The companies Act does, however, place many restrictions on the company. It must maintain certain books of accounts, appoint an auditor and file an annual return with the registrar of companies which includes the accounts as well as details of directors and mortgages.
A minimum of there shareholders and one of these as managing director is required to form a company. There are in fact two types of company limited by shares. The first is a `public company (plc) which has a minimum authorised and allotted share capital. This is a company which, according to its memorandum of association, may invite the public to subscribe for its shares. Any company, which is not `public', is called `private'. Public companies have further onerous legal requirements and restrictions placed upon them. Generally, most companies start life as `private' and only become `public' when they need funds from a wider range of shareholders. Companies pay `corporate tax' on their taxable profits.
Advantages of the limited company
- Members' (the directors and shareholders) financial liability is limited to the amount of money they have paid for shares.
- The management structure is clearly defined, which makes it easy to appoint, retire or remove directors.
- If extra capital is needed it can be raised by selling more shares privately.
- It is simple to admit more members.
- The death, bankruptcy or withdrawal of capital by one member does not affect the company's ability to trade.
- The disposal of the whole or part of the business is easily arranged.
- High status.
- Requirement to register the company with the registrar of companies and provide annual returns and accounts-which must be audited. All details of the company are available for public inspection so there can be no secrecy. There are penalties for failing to make returns.
- Can be more expensive to set up.
- May need professional help to form.
- As a director you are treated as an employee and must pay tax.
- The advantages of limited liability status are increasingly being undermined by banks, finance house, landlords and suppliers who require personal guarantees from the directors before they will do business.
Requirements For A Private Limited Company
- A Registered Business Name: This must be followed by the world Limited or Ltd. The Companies Registration Office exercises some control over the choice of name-it can't be identical (or very similar to) the name of an existing company. It won't be considered if it is offensive or illegal and the use of certain words in a company (for example, `Institute', `National') can only be used in certain circumstances. The company name must be displayed in a conspicuous place at every office, or other premises where the company carries out business.
- A Registered Office: This need not necessarily be the same address as the business is conducted from. Quite frequently the address used for the registered office is that of the firm's solicitor or accountant. This is the address, through, where all official correspondence will go.
- Shareholders: There must be a minimum of two shareholders (also described as `members' or `subscribes'). A private company can have up to fifty shareholders.
- Share Capital: The company must be formed with a stated, nominal share capital divided into shares of fixed amounts. Small companies are frequently formed with a nominal share capital of Rs.100.
- Memorandum of Association: The memorandum is the company's charter. It states the company's name; the situation of its registered office; its share capital; the fact that liability is limited and, most importantly, the object for which the company has been formed. In theory, the company can only operate in the areas mentioned in the objects clause but in practice the clause is drawn to cover as wide an area as possible, and anyway a 75 per cent majority of the members of the company can change the objects whenever they like. Nevertheless, it is worth bearing in mind that directors of the company will incur personal liability if the company engages in a type of business which is not authorised by the objects clause. The memorandum must be signed by at least three shareholders.
- Articles of Association: The document contains the internal regulations of the company-the relationship of the company to its shareholders and the relationship between the individual shareholders. Many companies don't bother to draw up their own articles but adopt (sometimes with some modifications) articles set out in the companies. Act, which are quire satisfactory for the majority of private companies. The articles must be signed by the initial shareholders.
- Certificate of Incorporation: This is the document, which the registrar of companies issues to you once he has approved you choice of name and your memorandum. When you receive this document your company legally exists and is ready to trade.
- Auditors: Every company must appoint a qualified auditor. The auditor's duty is to report to the treasurer whether or not the books of the company have been properly kept, and that the balance sheet and profit and loss account presents (or doesn't present) a true and fair view of the company's affairs and complies with the companies Act. Auditors are appointed or re-appointed at general meetings at which annual accounts are presented, and they hold office from the conclusion of the meeting until the next general meeting.
- Accounts: The companies Act lays down strict rules on accounting. Every company must maintain a set of records, which show the financial position at any one time with reasonable accuracy. The accounts comprise a profit and loss account and balance sheet with the auditors' and directors' reports appended. A new company's accounting reference period beings on its incorporation and runs until the following 31 March-unless the company notifies the registrar of companies otherwise. Within ten months of the end of an accounting reference period, and audited set of accounts must be laid before the shareholders at a general meeting and a set delivered to the registrar of companies.
- Registers, etc.: In addition to the accounts books, companies are required to have: a register of members and share ledger; a register of directors and secretaries; a register of share transfers; a register of charges; a register of debenture holders; a book can be purchased to hold all of the above. This will be provided automatically if you buy a running concern.
- Company Seal: All companies must have an engraved seal. This must be impressed on share certificates and must be used whenever the company has to execute a deed. Again, this is included in the ready-made company package.
It is certainly not a legal structure designed to give entrepreneurs control of their own destiny and maximum profits. However, if this is to be the system adopted you can register with the registrar of companies. You must have at least seven members at the outset. They do not have to be full-time workers at first. As in a limited company, a registered co-operative has limited liability (see under limited liability companies) for its members and must file annual accounts, but there is no charge for this. Not all co-operatives bother to register, as it isn't mandatory, in which case they are treated in law as a partnership with unlimited liability.
Co-operatives are not common throughout the entire entrepreneurial world, although some countries provide for companies with a structure similar to the Indian-style co-operatives
For example, in Denmark the AMBA is a special kind of limited company: a tax-free co-operative with its own legal regulations. The co-operative movement started at the turn of the century in the farming industry, and production of farm-related products, establishing dairies, slaughterhouses and other manufacturing units. They also include some wholesale and retail distribution channels for daily consumption goods, often officially controlled by the consumers.
Franchising is something of a halfway house, lying somewhere between entrepreneurship and employment. It holds many of the attractions of running a small business whilst at the same time eliminating some of the more unappealing risks. For example, the failure rate for both franchisers and franchisees is much lower than for the small business sector as a whole.
Let us look at the various types of relationship between licensee and licenser, which are described under the general heading franchises.
This could be for a particular product, such as a make of car. It is also sometimes referred to as an agency, but there is a fundamental difference between these two concepts. An agent acts on behalf of a principal, and even though he or she may have an agency for the products and services of more than one principal, what the agent does, says or represents to third parties is binding on the principal in question, as if they were employer and employee. A distributorship, however, is an arrangement where both parties are legally independent, as vendor and purchaser, except that the purchaser, in exchange for certain exclusive territorial rights, backed up by the vendor's advertising, promotion and, possibly, training of staff, will be expected to hold adequate stock and maintain the premises in a way that reflects well on the vendor's product or service.
A License to Manufacture
This applies to a certain product within a certain territory and over a given period of time. The licensee may have access to any secret process this involves and can use the product's brand name in exchange for a royalty on sales.
This arrangement resembles a dictatorship. Licenser and licensee are independent of each other, except that the licenser will no doubt insist that the licensee complies in order to preserve the good name of the product. The arrangement is often found in industry and a well-known example is Modi Xerox's license to produce the photocopying devices pioneered by the Xerox Corporation.
The Use of a Celebrity Name
The name of a well-known person can be used to enhance the sales appeal of a product and guarantee, at least by implication, its quality.
The most common example is the endorsement, by a sports personality, of equipment associated with the sports person's field of sport and bearing his or her name, in return for a royalty payment by the manufacturer.
The realisation that a `personality' can sell things bearing his or her name came about principally through the extensive exposure given to sports in the medial. In the 1930s there were some attempts to capitalise on movie stars' names in a similar way-an early poster associating Ronald Reagan with a brand of cigarettes has been much reprinted since he become prominent in another sphere-but sports persons have been more ready, and perhaps better organised, to cash in on the advertising spin-off from the media coverage they get. A name can be franchised, at least for a while, to validate a product, particularly if there appears to be a direct connection between them: Arnold Palmer golf clubs, for instance.
The Use Of A Trade Mark
Here a widely recognised product is exploited commercially for a fee-subject to certain licensing conditions-rather than the name of an individual. An instance with which many readers will be familiar was Rubik's cube, always shown with the symbol TM beside it.
Business Format Franchising
The term `franchising', which is borrowed from the French, originally meant being free from slavery. Today, business format franchising is the name given to a relationship in which the owner of a product, a process, or a service allows a local operator to set up a business under that name, for a specified period of time. The local operator (the franchisee) pays the parent organisation (the franchiser) an initial fee and, usually, continuing royalties for the privilege.
The franchiser lays down a blueprint on how the business should be operated: the content and nature of the goods and services being offered, the price and quality of these goods, and even the location, size and layout of any premises to be used. The franchiser also provides the franchisee with training and other back-up support, such as accounting systems, advertising programmes and personnel recruitment and selection advice.
In essence, franchising thrives because it merges the incentive of owning a business with the management skills of big business. And personal ownership is one of the best incentives yet created to spur hard work.
Franchising may benefit not only the franchisee but also the franchiser. For example, it may enable the franchiser to grow rapidly by using other people's (that is, the franchisee's) money. That is largely how giant franchisers like McDonald's and Baskin-Robbins have mushroomed into billion-dollar businesses in so short a time.
The idea that franchisees are independent business people is something of a myth. Franchisees generally are not free to run their business as they see fit. They are often hamstrung by the franchiser's policies, standards and procedures.
One franchiser describes the ideal franchisee as the sergeant type- midway between the general who gives the orders, and the private who merely follows them. People who want their own business to escape taking orders from others frequently see franchising as the answer. They are subsequently frustrated by lack of autonomy.
Franchise: Pros And Cons
The advantages and disadvantages of taking up a franchise depend to some extent on the content of the agreement, but there is a core of balancing factors, which are largely common because they relate to the kind of activity which franchising involves.
From the franchiser's point of view, the advantages are that the does not have any direct investment in an outlet bearing his name. The inventory and equipment are owned by the franchisee. Because of the shortage of prime sites, there is a growing trend for franchisers to acquire leases on behalf of franchisees, or at any rate to stand as guarantors. Nevertheless, the effect on the liquidity of the franchiser, in contrast to expansion by opening branches, is enormous-though if the franchiser does his job properly there are heavy start-up costs in piloting the franchise and in such aspects as training. Thereafter there are further costs in providing a continuing service to franchisees in such matters as research and development, promotion, administrative backup and feedback and communication within the network. The expectation is that these costs will be offset by the fact that the franchisee, as the owner of the business, is more likely to be highly motivated than an employee and more responsive to local market needs and conditions; that the franchiser receives an income from the franchise; and that, without direct financial involvement, he may in this way derive some of the benefits of expansion, in as much as franchising provides economies of scale from centralised purchasing and, where feasible, some degree of centralised administrative facilities.
The disadvantages are that, although the failure of an individual franchise may reflect badly on the franchise operation as a whole, all the franchiser can control is the format itself and he can only influence the running of individual operations by pulling the reins on this or that clause in the agreement-the broad terms of which we shall discuss shortly. In extreme cases the franchiser may terminate the agreement or at any rate not renew it, but he cannot throw the franchisee out as if he were an employee. The franchiser is therefore dependent on the willingness of the franchisee to observe the rules and play the game. A failure to do so can be damaging to the franchiser and the franchisee as a whole.
Another disadvantage sometimes turns out to lie in the curious mixture of dependence and independence that franchising produces. The franchisee is encouraged to think of him as an independent business entity, and to a large extent this is indeed the situation. Nevertheless, he is operating the franchiser's business concept under a license for which a fee is payable. There are cases where franchisees identify so closely with the particular business they are running that they ultimately resent the payment of the fee. The success is felt to be due to the franchisee's own effort, not to the franchise concept or to the franchiser. This is apt to be particularly so if the franchiser adopts a lower profile than he should, either in terms of direct help or in matters such as national advertising. Clearly, of course, the franchisee would be obliged to pay under the terms of agreement, but a sour relationship is not good for either party, so it is up to the franchiser to maintain his part of the bargain both in letter and in spirit. Franchises are a matter of mutual interest and obligations.
From the point of view of the franchisee also there are certain plus and minus points.
- A business format or product which has already been market tested and, presumably, been found to work. As a consequence, major problems can be avoided in the start-up period.
- A recognised name of which the public is already aware and which has credibility with the suppliers.
- Publicity, both direct, in that the franchiser advertises his product or services, and indirect promotion through signage and other corporate image promotion in all the franchiser's outlets.
- Although taking up a franchise is not cheaper than starting on you own, it is considered that the percentage of expensive errors made by individuals starting on their own is substantially reduced by the adoption of a tested format.
- Direct and close assistance during the start-up period.
- A period of training on production and management aspects.
- A set of standard management, accounting, sales and stock control procedures incorporated in an operating manual.
- Better terms for centralised bulk purchase negotiated through the franchiser, though he may be looking for mark-ups in this area as a source of revenue from the franchise.
- The benefit of the franchiser's research and development in improving the product.
- Feedback throughout the network on operating procedures and the facility to compare notes with other franchisees.
- Design of the premises to an established scheme saves on interior design fees and may eliminate these altogether where the franchiser has a set of specifications.
- The benefit of the franchiser's advice on equipment selection and initial inventory levels, though this may be partial where the franchiser is also the supplier.
- Help with site selection, negotiating with planning officers and developers.
- Possibly, though not universally, access to the franchiser's legal and financial advisers.
- The protected or privileged rights to the franchise within a given area.
- Improved prospects of obtaining loan facilities from the bank.
- The backing of a known trading name when negotiating for good sites with letting agents or building owners.
- Business format franchising is, of necessity, something of a cloning exercise. There is virtually no scope for individual initiative in matter of product, service or design. However, the franchiser will demand uniformly high standards of maintenance, appearance and packaging in whatever the franchise entails. These are usually monitored by regular inspection.
- The royalty (sometimes called a management fee) paid to the franchiser. This is usually based on gross turnover or on profit. The problem here is that if the franchiser is not pulling his weight, or if the franchisee is not pulling his weight, or if the franchisee does not feel this to be the case, the royalty can be subject to bitter dispute. The franchisee may than feel justified in withholding all or part of the royalty on the grounds of non-performance by the franchiser, but this is always a difficult matter to prove in the courts. Furthermore, the franchiser's resources to conduct a long-drawn-out proceeding will usually be greater than the franchisee's.
- A further problem is that a high turnover does not necessarily imply a highly profitable operation. If the franchiser's income is wholly or partially based on turnover, he or she may try to push for this at the expense of profitability.
- The franchisee is not absolutely at liberty to sell the franchise even though he is in many respects operating the business independently. The sale has to be approved by the franchiser, who is also entitled to vet the vendor and charge the cost of any investigations made to the existing franchise. Furthermore, although the business would be valued as a going concern in trading terms, the goodwill remains the property of the franchiser. Again, the franchisee may feel that, at least to some extent, the goodwill has been built up by his or her own efforts. The resale of a franchise, in other words, is a process rich in those gray areas, which can lead to expensive litigation.
- Territory agreements may be difficult to enforce in practice. For instance, the hypothetical firm of Calorie. Countdown may have the exclusive rights in the suburb in which it is located, but there is nothing to prevent the citizens of that suburb from buying their slimmer's meals in some other neighboring Calorie Countdown outlet.
- The franchisee, as well as paying a royalty to the franchiser, may be obliged to buy goods and services from his as well-possibly at disadvantageous rates.
- Through the franchiser please all sorts of control and obligations on the franchisee to maintain the quality of his image, the scope for doing the reverse is more limited. If the franchiser's products or service gets bad publicity, this is bound to affect the franchisee adversely, and there is very little he could do about it. Equally, the franchiser may engage in promotional activities (and involve the franchisee in them as well), which, though perfectly harmless, may, from the point of view of a particular outlet, be a waste of time.
- The failure of a franchiser may leave the franchisee with a business, which is not viable in isolation.
A Mutual Dependence
From this list of advantages and disadvantages to both parties, a more detailed picture emerges of the business format franchise as a relationship of mutual dependence, which allows each party to utilise its strengths to their mutual and, at best, equal advantage.
The franchiser is able to expand without further investment and though the return is obviously lower than from expansion by ownership, he does receive an income from the franchisee as well as getting both an outlet for his product and more muscle in negotiating the purchase of materials and equipment. The franchisee, on the other hand, is able to concentrate his entrepreneurial skills at the sharp end of sales and customer service, while the administrative headaches of setting up the business are mitigated by the uniform nature of the format. By the same token, he s saved, through feedback to the franchiser of the accumulated experience of the franchises, from making the errors to which businesses are prone in their earlier and most vulnerable stages. This relationship is expressed as agreements-the purchase agreement and the franchise agreement. But before considering these, it is necessary to evaluate the franchise as a whole.
A study of the personal franchisee characteristics required for success carried out by Professor Russell M. Knight of the University of Western Ontario concluded that franchisees and franchisers have a large measure of agreement on what makes for success.
They disagreed only in rating management ability and creativity-a point that may provide some clues as to what franchisers are really looking for in a franchise.