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ENTREPRENEUR DEVELOPMENT SYBBA 3

UNIT 1

ENTREPRENEURIAL MANAGEMENT

INTRODUCTION

The concept of entrepreneurship has been around for a very long time. In the last
decade it has resurged as if a new discovery has been made. Usually anyone who
runs a business is called an entrepreneur. The more precise meaning of
entrepreneur is one who creates his own business i.e. a person who organizes,
operates and assumes the risk of a business venture.

The concept of entrepreneurship is an age-old phenomenon that relates to the


vision of an entrepreneur as well as its implementation by him. It is also the
process of setting up a new venture by the entrepreneur.

MEANING & DEFINITIONS


Entrepreneur:
According to America heritage dictionary;
Entrepreneur is a person who organizes operates and assumes the risk for
business venture

According to encyclopedia Britannica


Entrepreneur as the individual who bears the risk of operating a business in the
face of uncertainty about future condition and who is rewarded accordingly by his
profit or losses.

Richard cotillion says


Entrepreneur is the agent who purchased the means of production for
combination into marketable product.

So we can say that entrepreneur a person who takes risk for establishing a new
venture or business in order to create utility for the welfare of human being as
well as for him of herself. She or he is always a person who seeks out
opportunities and takes on challenges.

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Entrepreneurship:

Entrepreneurship is the capacity for innovation investment and expansion in new


markets product and techniques. - Natheal h. leff:

Webster highlights entrepreneurship as economic venture organizing and risk


taking capabilities.

Joshep a Schumpeter describe entrepreneurship is the force of creative


destruction whereby established way of doing things are destroyed by the
creating of new and better ways to get things done.

Entrepreneurships is a process involving various actions to be taken to establish


an enterprise. - S. S. kanaka:

From the functional view point entrepreneurship is defined as the combination of


activities such as perception of market opportunities gaining command over
scarce resources purchasing input producing and marketing of product
responding to competition and maintaining relation with political administration
and public bureaucracy for concession licenses and taxes etc.

CHARACTERISTICS OF AN ENTREPRENEUR:

An entrepreneur is a person who initiates a business venture. there are some


essential feature of an entrepreneur which are describe below.

1. Risk taking capability: every business has risk of time money etc .so an
entrepreneur must have the risk taking capability.
2. Creativity and innovation: an entrepreneur has an initiator possesses
creativity and innovative power.
3. Need for achievement: the entrepreneur has strong desire to achieve the goal
of business. he is always driven by the needs for achievement.

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4. Need for autonomy: an entrepreneur does not like to be under anybody. it is


the need for autonomy which drives a person to be an entrepreneur.
5. Internal locus of control: an entrepreneur believes in him his work.
6. External locus of control: he also believes in fate for ultimate result.
7. Self confident: an entrepreneur has confidence in him.
8. Leadership capability: an entrepreneur must have leadership capability to lead
works under him
9. Industriousness: a successful entrepreneur must have leadership capability to
lead workers working under him.
10.Decision making capability: the entrepreneur has capability to take quick
decision
11.Adaptability: he has the capacity to adapt with any kind of situation that arise
in the enterprise
12.Foresightness: The entrepreneurs have a good foresight to know about future
business environment.
13.Others; the other feature are dynamism, ambition, education and training,
long term involvement, future orientation.

Nature of Entrepreneurship

Creation of an enterprise It involves creation and operation of an enterprise.

Organizing function It brings together various factors of production for


economic use.

Innovation It is an automatic, spontaneous and creative response to changes


in the environment.

Risk bearing capacity It assumes uncertainty of future.

Managerial and leadership function It is responsible for controlling and


coordinating the human resource and giving direction to an enterprise.

Gap FIlling It lls the gap between human needs and available products and
services.

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QUALITIES OF SUCCESSFUL ENTREPRENEUR:

To become a successful as an entrepreneur in its business life, a businessman


should possess a quite a number of essential qualities. Those are noted below:
1. Moderate risk taking: an entrepreneur always takes calculated risk to
operate the organization
2. Hard work: an entrepreneur is very much hard worker, he or she always
busy with various types work.
3. Accountability: a successful entrepreneur is accountable well as his
associates always accountable to him.
4. Educated in real sense: successful entrepreneur is educated In real sense .he
tries to implement his organizational objectives through his education.
5. Analytical mind: a successful entrepreneur is analytical minded. he
scrutinizes every activity on the organization.
6. Dynamic leadership: a successful entrepreneur is always dynamic to operate
the organization
7. Presence of mind: a successful entrepreneur is always at present of mind he
is always aware of activities that to happening in the organization and around him
8. Accommodative: a good entrepreneur has the capacity to make his own
place at every sector
9. Courageous and tactful: Corsages and techniques is very much essential for
a successful entrepreneur
10. Maker of right decision: A successful entrepreneur makes right decision in
right time in right place
11. Foresighted: a successful entrepreneur foresights the future and take
decision accordingly
12. Right perception of things: A successful entrepreneur things in a right way
13. Enjoy simple life: A successful entrepreneur always deals a simple life a
general people of the society
14. Strong desired to success: A successful entrepreneur have a strong desire to
success. he is driven by the desire to success.

15. Innovation: innovation is the process of making new something.

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DIFFERENT TYPES OF ENTREPRENEURS:

On the basis of nature Clarence Danhof classified entrepreneurs into four


categories. These are
1. Innovative entrepreneurs: An innovative entrepreneur in one, who
introduces new goods, inaugurates new method of production, discovers new
market and recognizes the enterprise. It is important to note that such
entrepreneurs can work only when a certain level of development is already
achieved and people look forward to change and improvement.
2. Imitative entrepreneurs: These types of entrepreneurs creatively imitate the
innovative technical achievement made by another firm. Imitative entrepreneurs
are suitable for underdeveloped countries as it is hard for them to bear the high
cost of innovation.
3. Fabian entrepreneurs: Fabian entrepreneurs are characterized by very great
caution and skepticism to experiment any change in their enterprises. They
usually do not take any new challenge. They imitate only when it becomes
perfectly clear that failure to do not so would result in a loss of the relative
position in the enterprise.
4. Drone entrepreneurs: They are characterized by a refusal to adopt any
change even at cost of severely reduction of profit.

ENTREPRENEUR V/S ENTREPRENEURSHIP

1) Entrepreneur is a person. Entrepreneurship is a process.


2) Entrepreneur is an organizer. Entrepreneurship is an organization.
3) Entrepreneur is an innovator. Entrepreneurship is an innovation.
4) Entrepreneur is a risk bearer. Entrepreneur is a risk bearing.
5) Entrepreneur is a motivator. Entrepreneur is a motivation.
6) Entrepreneur is a creator. Entrepreneur is a creation.
7) Entrepreneur is a visualizer. Entrepreneur is a vision.
8) Entrepreneur is a leader. Entrepreneurship is a leadership.
9) Entrepreneur is an imitator. Entrepreneurship is an imitation.

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JOHN KAOS MODEL OF ENTREPRENEURSHIP

John Kao has developed a conceptual model of entrepreneurship. As shown in


the figure, four factors are involved in entrepreneurship development.

1. The Person: the individual is the key factor in entrepreneurial activity. He is a


creative personality and makes things happen. Entrepreneurs has distinct
personality, certain skills and experience and has motivation. The success of
entrepreneurial venture depends largely on the personality of the entrepreneur.
Entrepreneurs requires a variety of skills ranging from intuition to analytical
ability.

2. The Task: An entrepreneur has to perform several tasks. First he has to perceive
opportunity and then bring together necessary resources to give life to the idea.
He has to provide The Environment: entrepreneur and his organization are part
of the environment. The environment influences, facilitates or hinders the
growth of entrepreneurship and the viability of the enterprise. He draws
resources from the environment, and his output goes to the environment. The
environment consists of several elements such as economic, socio-cultural,
political, legal and others. The entrepreneurs will keep on acting and reacting to
various environmental changes. He tries to understand the environment well.

3. The Organization: The entrepreneur builds the organization and his creative
work takes place in it. It includes the organization structure, rule, policies,

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culture, human resources systems and communication systems. The organization


should fit best with personal vision, with they key task to be preformed and with
the environment leadership. His leadership qualities will attract and retain people
with him.

4. Environment: This refers to economic and political philosophy of the


government and consequential encouragement generated and opportunities
available in a society as a result of such policies .

Even though entrepreneurship is viewed here a dependent variable with all the
four sets of factors influencing and contributing to, it may be noted that the
individual, the environment and support systems are considered to influence
entrepreneurship directly,

ROLE OF ENTREPRENEUR IN ECONOMIC DEVELOPMENT

(1) Employment Generation : Growing unemployment particularly educated


unemployment is an acute problem of the nation. If a hundred persons become
entrepreneur they not only create a hundred jobs for themselves but also provide
employment to many more. These enterprises grow providing direct and indirect
employment to many more.

(2) National Income : National Income consists of goods & services produced in
the country and those imported. An increasing number of entrepreneurs are
required to meet this increasing demand for goods and services. Thus
entrepreneurship increases the national income.

(3) Dispersal of Economic Power : When the number of entrepreneurs increases,


a large amount of national wealth is also shared by a large number of
entrepreneurs, thus dispersing wealth. This dispersal of wealth promotes the real
socialism and makes the economy healthy.

(4) Balance Regional Development : The growth of industry and business leads to
a large number of public benefits like road, transport, health, education,
entertainment etc. A rapid development of entrepreneurship ensures a balanced
regional development. When the new entrepreneurs grow at a faster pace, in

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view of the increasing competition in and around the cities, they are forced to set
up their enterprise in the smaller towns away from big cities. This helps in the
development of the backward regions.

(5) Economic Independence : Entrepreneurship is essential for national self-


reliance. Businessman export goods and services on a large scale and earn the
scarce foreign exchange for the country. Such import substitution and export
promotion help to ensure the economic independence of the country.

(6) Reducing Unrest and Social Tension Amongst Youth : In the changing
environment where we are faced with the problem of recession in wage
employment opportunities, alternative to wage career is the only viable option.
The country is required to divert the youth with latent entrepreneurial traits from
wage career to self employment career. Such alternate path through
entrepreneurship could help the country in defusing social tension and unrest
amongst youth.

(7) Improvement in Living Standards : Entrepreneurs set up industries which


remove scarcity of essential commodities and introduce new products.
Production of goods on mass scale and manufacture handicrafts etc. in the small
scale sector help to improve the standard of life of a common man. These offer
goods at lower costs and increase variety in consumption.

(8) Harnessing Locally Available Resources and Entrepreneurship : India is


considered to be very rich in natural resources. A few large scale industries
started by entrepreneurs from outside the state in economically backward areas
may help as models of pioneering efforts, but ultimately the real strength of
industrialization in backward areas depends upon the involvement of local
entrepreneurship in such activities. Increased activities of local entrepreneurs will
also result in making use of abundantly available local resources.

(9) Innovations in Enterprises : Business enterprises need to be innovative for


their survival and better performance. Entrepreneurship development
programmes are aimed at accelerating the pace of small firms' growth in India.

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ENTREPRENEUR PROCESS

Idea Generation: In a sense, opportunity identification and selection are akin to,
what is termed in marketing terminology, new product development. Thus,
product or opportunity identification and selection process starts with the
generation of ideas, or say, ideas about some opportunities or products are
generated in the first instance.

The ideas about opportunities or products that the entrepreneur can consider for
selecting the most promising one to be pursued by him/her as an enterprise, can
be generated or discovered from various sources- both internal and external.

Sources of Ideas:

(i) Knowledge of potential customer needs,


(ii) Watching emerging trends in demands for certain products,
(iii) Scope for producing substitute product,
(iv) Going through certain professional magazines catering to specific interests like
electronics, computers, etc.,
(v) Success stories of known entrepreneurs or friends or relatives,
(vi) Making visits to trade fairs and exhibitions displaying new products and
services,
(vii) Meeting with the Government agencies,
(viii) Ideas given by the knowledgeable persons,
(ix) Knowledge about the Government policy, concessions and incentives, list of
items reserved for exclusive manufacture in small-scale sector,
(x) A new product introduced by the competitor, and
(xi) Ones market insights through observation.
In nutshell, a prospective entrepreneur can get ideas for establishing his/ her
enterprise from various sources. These may include consumers, existing products
and services presently on offer, distribution channels, the government officials,
and research and development.

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Opportunity/Product Identification: After going through above process, one


might have been able to generate some ideas that can be considered to be
pursued as ones business enterprise.

Imagine that someone have generated the five ideas as opportunities as a result
of above analysis:

1. Nut and bolt manufacturing (industry)


2. Lakhani Shoes (industry)
3. Photocopying unit (service-based industry)
4. Electro-type writer servicing (service-based industry).
4. Polythene bags for textile industry (ancillary industry)
An entrepreneur cannot start all above five types of enterprises due to small in
size in terms of capital, capability, and other resources. Hence, he/she needs to
finally select one idea which he/she thinks the most suitable to be pursued as an
enterprise. How does the entrepreneur select the most suitable project out of the
alternatives available? This is done through a selection process discussed
subsequently.
Having gone through idea generation, also expressed as opportunity scanning
and opportunity identification, we can distinguish between an idea and
opportunity. We are giving below the two situations that will help you understand
and draw the line of difference between an idea and an opportunity.

Entrepreneurial team working : Traditionally the entrepreneur has been thought


of as an individual who works alone to achieve his/her objectives, managing in a
somewhat autocratic manner. Increasingly it is being realized that this is not the
case, that the successful entrepreneur is not an autocratic leader but someone
who can work with and through others to achieve his/her objectives. He/she is a
team worker.

Chairperson: the teams co-ordinator. He/she works primarily through others.


The chair is mature, confident and trusting, with good interpersonal skills. He/she
has a calming influence

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Monitor-evaluator: the person who assesses ideas. He/she explores all the
options and is capable of thoroughly analysing large amounts of data. His/her
judgements are good and rarely do they make the wrong decisions.

Resource investigator: the teams fixer. He/she has a wealth of contacts and is
always busy, often exploring new opportunities or/and picking other peoples
brains

Team worker: holds the team together. This is the teams counsellor, the person
who reconciles differences. They promote harmony especially at times of crisis.
Usually they are mild-mannered and sensitive, which makes them aware of
problems and difficulties within the team.

Company worker: the implementerturns ideas into manageable tasks. Practical,


gets on with the job and organizes his/her work logically and orderly. They are
disciplined, reliable, loyal and conservative, but can be inflexible and slow to
change. Recognized by their colleagues as being sincere and trustworthy.

Completer-finisher: makes sure things get done. They have an eye for detail and a
concern for deadlines and timetables. Hence they pick up on omissions and errors
and have relentless follow-through.

Specialist: the teams technical expert. They are usually single-minded


selfstarters. While they are dedicated (to their specialism and the team), they are
narrowly focused and tend not to make a broad contribution. Clearly, for tasks to
be progressed, all of these roles are needed.

Hence the successful entrepreneur, whilst frequently possessing many of the


qualities him/herself, frequently joins in partnership with others to ensure that
the idea/concept is brought to fruition.

STRATEGIC PLANNING FOR BUSINESS

1. The creation of a mission statement for the business : The Mission Statement
of a Business is a Statement of the purpose of the business which is intended to
unify the business to focus towards one common page. A well worded Mission
Statement will put all stakeholders (from management to employees to
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shareholders) on the same page and will get all stakeholders thinking along the
same lines.

2. Creating a vision for the business ; A Vision is a realistic dream for the
business for the future. With the Mission Statement in mind, a Vision needs to be
created and all stakeholders need to buy into the Vision. A Vision is normally
focussed on the long term and paints the picture of where a business should be
heading to or what should a business look like in the long term in a near perfect
environment.

3. Translating the vision for the business into short-term and long-tem
objectives ; The next step is to set short-term and long-term measurable and
obtainable targets that would ultimately lead the business to its Vision as set out
for the business. By linking the objectives to the Vision, the business will focus on
achieving the future realistic dream it set out for itself.

Once objectives have been set in this way, these will be evaluated and re-
evaluated on a continuous basis to establish if the business is realising the
objectives on its way to its Vision.

4. Putting strategies into place to achieve the objectives

At this stage various possible practical actions plans will be analysed and decided
upon to achieve the strategic objectives. Core to the decision on which action
plans to be implemented are the following:

What are the different possible plans available to achieve the objectives?
Who will implement the plans?
With what will the plan be implemented (what resources are needed
and are the resources readily available)?
By when will the plan be implemented?
These plans will be business and industry specific and a detailed analysis of each
environment will have to be done before a decision on the course of action is
taken. Once the course of action is decided upon, a budget can be drawn up.
Theoretically a budget is an expression, in financial terms, of the strategic and
operation plans of an organisation, for a forthcoming period of time.
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Planning the process : Various items should be taken into account during the
process as mentioned above, especially after the mission and vision have been
created, preferable on a yearly basis. An analysis of these items will help in setting
the measurable and obtainable objectives, as well as deciding on the correct
action plans to achieve the objectives.

Listed below are some items to take into account:

The current economic cycle : The economic cycle refers to the fluctuations of
economic activity (business fluctuations) around its long-tem growth trend.
The stage in the life cycle of the businesss products ; All firms and products
have a life cycle. The length of the cycle can vary enormously from business to
business. The stages in the life cycle are: Introduction in the market, Growth,
Maturity, Saturation and decline.

SWOT analysis of the business : Each business should be aware of its


Strengths, Weaknesses (Internal Environment) and its Opportunities and
Threats (External Environment) to be able to plan for its future.

PESTEL environment analysis : For Strategic Planning purposes a business


needs to know the environment in which it is operating as it will directly
influence the course of action. Factors to take into account are Political,
Economical, Social, Technological, Environmental and Legal environmental
analysis.

Industry analysis: Understanding the industry will help in setting the correct
plans. The following factors should be analysed:

How big is the industry?


Market Characteristics
Industry Conditions
Key Competitors
Industry Performance
Industry Outlook
Competitive analysis : A continuous process of comparing a businesss
strategies, products or processes with those of best-in-the-class
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organisations. Such benchmarking will help a business in closing any gaps


that might be existing relative to the industry leaders.
The financial objective of a business, to create wealth by adding value to
providers of capital, lies at the core of the whole strategic planning process. All
planning activities should ultimately also be weighed against this objective.

Franchising
Introduction : Some entrepreneurs are ready to take an idea, build a business,
find their own financing, and take the risk of starting with very little and hopefully
building a successful venture. Others want the opportunity to be their own boss,
but aren't excited about blazing their own trail. For these more risk-adverse
entrepreneurs, franchising may be just what they are looking for.

Definitions :
A franchise is a type of license that a party (franchisee) acquires to allow them to
have access to a business's (the franchiser) proprietary knowledge, processes
and trademarks in order to allow the party to sell a product or provide a service
under the business's name. In exchange for gaining the franchise, the franchisee
usually pays the franchisor initial start-up and annual licensing fees.
A franchise is the agreement or license between two legally independent parties
which gives:
a person or group of people (franchisee) the right to market a product or service
using the trademark or trade name of another business (franchisor)
the franchisee the right to market a product or service using the operating
methods of the franchisor
the franchisee the obligation to pay the franchisor fees for these rights
the franchisor the obligation to provide rights and support to franchisees
In India, franchising has been popular in fast food chains, beauty parlors,
fitness centres, computer education, clothing, shoes, hotels, pathology, health
care etc. NIIT, APTECH, LCC, McDonald, Nirulas, Wimpy, Haldiram etc. are some
popular examples of franchise.

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Features :

(i) Franchise relationship is based on an agreement; which lays down terms and
conditions of this relationship.

(ii) The term of franchise may be for 5 years or more; and the franchise
agreement may be renewed with the mutual consent of both the parties.

(iii) The franchisee gives an undertaking not to carry on other competing business
during the term of the franchise; and the franchiser gives an undertaking not to
terminate the franchise agreement before its expiry except under situations
which may justify the termination of the franchise agreement.

(iv) The franchisee agrees to pay specified royalty to the franchiser, as per terms
of the franchise agreement.

(v) Franchise means selling the same product and maintaining a similar type of
shop decor (i.e. style of interior decoration); for which franchiser provides
assistance to franchisee in organising, merchandising and management. The
franchiser virtually sets up the business for the franchisee.

(vi) Franchisee is supposed to follow parent companys policies regarding mode of


business operations, as per clauses in the franchise agreement.

(vii) Franchiser may give training to personnel working in the franchisees


organization.

Merits of Franchise:
From the Viewpoint of the Franchiser:
(i) Expansion of Business: : The franchiser is able to expand his business, and gain
wider acceptance of his brand name or trademark, because of franchise
agreement. The franchiser can enter into foreign markets also and enhance his
goodwill and business.

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(ii) Regular Income: The franchiser receives a regular income by way of royalty
from the franchisee at no extra cost; as cost of new premises and extra staff is
borne by the franchisee.
(iii) Economical Advertising: Advertising done by the franchiser benefits the
franchisee also. Thus, under franchise, advertising proves very economical, in the
long-run.
(iv) Advantage of Market Feedback: The franchiser gets market feedback about
product popularity, needs, preference of local customers from the franchisees.

From the Viewpoint of the Franchisee:


(i) Little Investment Needed: The franchisee can start business with lesser
investment than would be required had he to start an independent business of his
own.
(ii) Advantage of Goodwill to Franchisee: Franchisee gets the immense
advantage of the goodwill created by the franchiser. Higher success rate is found
in cases of franchise; as the franchisee averts the risk of starting a new business of
his own and gets an income higher than possible from his own independent
business.
(iii) Management Assistance etc.:
The Franchiser provides may types of assistance to franchisee like:
(a) Store lay-out guidance
(b)Training to personnel
(c) Marketing support
(d)Financial assistance etc.
(iv) Advantage of research and development: The parent company makes huge
investment in research, innovations etc.; the advantage of which goes to
franchisee in the normal course of functioning of business.

Limitations of Franchise:
From the Viewpoint of the Franchiser:
(i) Danger of image tarnishing: If the franchisee does not maintain standards of
quality and service; there is a danger that the goodwill and image of the reputed
franchiser is tarnished.
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(ii) Problems and costs for the franchiser:


In franchise, the franchiser faces many problems and costs like:
(a) Vocal and demanding attitude of franchisee
(b) Problems and costs of communicating with franchisees located at distant
places
(c) Costs of training, financing and advertising, done for the franchisees.
From the Viewpoint of the Franchisee:
(i) Lack of freedom: The franchisee does not have the freedom to run his business
in an independent manner. He has to abide by management and operational
policies of the franchiser whether suitable to him or not.
(ii) Limited range of products: The franchisee cannot introduce new products in
his business; except those permitted by franchiser. This may mean loss of
business to franchisee amidst local conditions surrounding his business.
(iii) Fixed royalty payment: The franchisee has to make payment of royalty to the
franchiser on a regular basis. This considerably reduces the income of the
franchisee.

Types
1. Product Franchising: This is the earliest type of franchising. Under this, dealers
were given the right to distribute goods for a manufacturer. For this right, the
dealer pays a fee for the right to sell the trademarked goods of the producer.
Product franchising was used, perhaps for the first time, by the Singer
Corporation during the 1800s to distribute its sewing machines. This practice
subsequently became popular in the petroleum and automobile industries also.
2. Manufacturing Franchising: Under this arrangement, the franchisor
(manufacturer) gives the dealer (bottler) the exclusive right to produce and
distribute the product in a particular area. This type of franchising is commonly
used in the soft-drink industry.
3. Business-format Franchising: This is recent type of franchising and is the most
popular one at present. This is the type that most people today mean when they
use the term franchising. In the United States, this form accounts for nearly three-
fourth of all franchised outlets.

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Business-format franchising is an arrangement under which the franchisor offers a


wide range of services to the franchisee, including marketing, advertising,
strategic planning, training, production of operations manuals and standards and
quality control guidance.

Franchise Agreement
A franchise is an agreement between two business partners: the franchisee and
the franchisor. The franchisee is the entrepreneur that is going to buy the
franchise from the larger company, also known as the franchisor. When a
franchisee buys a franchise, they are essentially paying the franchisor for their
name, general business plan, and help in starting and operating the business.
Franchise is a continuing relationship between the parent company (called the
franchiser) and an individual business unit (called the franchisee); under which
the parent company provides a licensed privilege to the business unit to use its
trade mark, in return for a royalty payment made to the parent company.

The Franchise Agreement is a legally binding agreement which outlines the


franchisor's terms and conditions for the franchisee. It also outlines the
obligations of the franchisor and the obligations of the franchisee. The franchise
agreement is signed at the time an individual makes the decision to enter the
franchise system.

The franchise agreement is the document which underpins your relationship with
your franchisor.

Grant : This is where the franchisor gives you the right to operate your business
using the franchisor's system which includes its manual and intellectual property
(i.e. brand name and trade marks

Term ; Most grants of franchises are only of a limited period of time. Usually this
period is between 5 to 7 years but can be both longer and shorter.

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Territory : Territory can be a major issue. The franchisee wants an exclusive


territory to ensure that they will not be competing with another franchisee within
a specified area

Fees : Generally speaking there are three types of fees payable by a franchisee
under a franchise agreement initial, ongoing and one off fees. The initial
franchise fee (for the grant of the franchise) (refer cooling off period below) is
payable on signing of the agreement or after the cooling off period has expired.
Ongoing fees such as the royalty (or sometime called franchise fee or franchise
service fee) are payable on a regular basis (usually monthly) to the franchisor for
the continued use of the franchisor's intellectual property and for the support
received from the franchisor.

Training : It is essential that you become familiar with the requirements of the
franchise system before you begin operating your franchise business. The
franchisor will usually have an obligation to provide you with some form of initial
training and you will be required to attend this and complete it to the franchisor's
satisfaction.

Approved Suppliers : You will usually be restricted to selling only those products
and services which have been approved by the franchisor and which have been
purchased from those suppliers which are approved and notified to you by the
franchisor.

Advertising Fund : It is standard that the franchisee pays the franchisor an


ongoing amount on a regular basis (usually monthly) for advertising purposes. The
franchisor will use this amount together with amounts paid by other franchisees
to advertise the system as a whole for instance national television campaigns
etc.

Intellectual Property and Confidential Information : The franchise agreements


will contain pretty strict provisions in respect of the franchisor's intellectual
property and confidential information. In a very basic sense intellectual property
refers to human creations and innovations which are capable of being protected

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under law and includes copyright, trade marks, brand names, patents, logos,
literary works, written texts, and artistic works.

Insurance : The franchisor will require you to take out various types of insurance
in respect of your business (including insurance in respect of the premises, public
liability insurance etc) and most often will require you to provide the franchisor
with evidence on a regular basis that you have this insurance in place. In addition
the franchisor may require the insurance policy to record the fact that the
franchisor is an interested party.

Renewal : More often than not your franchise agreement will provide that you
have a right to renew it at the end of the first term provided you meet certain
terms and conditions.

Termination : One of the risks of purchasing a franchise agreement is that it is


terminated prior to the end of the term. This is why it is essential that you
understand the circumstances in which a franchisor can terminate your
agreement.

Guarantee : If the franchisee is a company then the directors and shareholder of


that company will be required to personally guarantee the company's obligations
under the franchise agreement.

Checklist for Franchisees


The following checklist of questions should assist you in making a decision about
acquiring a franchise.
Self Evaluation
1. Do you have the capital required for investment?
2. Do you have the necessary management skills, education and work
experience required?
3. Are you fully aware of the work involved in running this franchise?
4. What is the best franchise for me?
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5. What types of businesses are succeeding these days, with every indication
that they will continue to succeed?
6. What is the kind of business you would like to be in?
7. Is someone offering a franchise in your area of interest, which you believe
will help you to succeed, and that you can afford?
8. Can you work within the limits of a franchise system? Franchisors are not
looking for real entrepreneurs, but more entrepreneurial sergeants who
can fit into the system.
The Franchise Operation
1. What is the franchiser's background and how long has it been offering
franchises?
2. Is the franchise financially stable?
3. How many franchises are operating now?
4. What innovations has the franchiser introduced since first starting?
5. Are you required to meet with existing franchise owners?
6. Does the franchiser provide local on-going training for franchisees for the
length of the contract?
The Product or Service
1. What makes the product or service unique?
2. Is there a reasonable demand for it?
3. Is it a product or service you would buy?
4. Are you allowed to carry other product lines?
5. Is it priced competitively with similar products or services?
6. Can the franchiser guarantee continual supply at a fair price?
7. Are there product warranties or guarantees? Who has responsibility?

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8. Is the product protected by a patent, trademark, or copyright?


9. Location and Sales Territory Is your territory clearly defined and exclusive?
Franchise Contract
1. Does the contract protect yourself as well as the franchiser?
2. Are the rights and obligations of both parties clearly stated?
3. Is the contract specific as to the type and size of operation you are
expected to manage?
4. Is the nature, duration, cost and extent of your training outlined in the
contract?
5. Are your payments to the franchiser clearly specified? Are the following
shown?

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