Question

CUBICULO INC. is a maker of modular fit-out systems for large buildings, specialising in dividing open-plan offices and public buildings into partitioned working areas. It carries on business in its own right, and also operates as a franchisor. Its franchisees are granted an exclusive geographical area, and have to buy partition components from CUBICULO INC., as well as make an initial payment for the franchise, pay an annual contribution to marketing costs and pay a percentage of sales. Larry and Harry are carpenters who originally carried on two separate carpentry businesses as sole proprietors, and later combined their respective businesses to operate as carpenters under a traditional partnership. After successfully trading for a number of years they wanted to expand. They decided to incorporate and they formed DIVIDERS INC., a New York closely held corporation in which they were the only shareholders. Shortly after incorporating they attended a franchise trade show. They were impressed by CUBICULO INC.’s stand at the show and by their franchise sale presentation. DIVIDERS INC. became Cubiculo’s local franchisee in Dutchess County, NY in the summer of 2017. Now, March 2018, DIVIDERS INC. is unhappy with the franchise as DIVIDERS INC. is not making returns on its investment at the levels which CUBICULO INC. indicated could be expected.

(a) What are the benefits and disadvantages of carrying on a business as (i) sole trader (ii) traditional partnership and (iii) closely held corporation

                                                 

(b) What are the benefits and drawbacks of franchising as a business organisation model

                      

(c) Noting DIVIDER INC’s dissatisfaction, what factors should a potential franchisee consider before entering a franchise agreement? As part of your answer consider whether all franchisors be required by law to provide complete estimates of the profitability of a prospective franchise based on the experiences of their existing franchisees, making an argument BOTH for and against.

Answer 1

a) (i) Sole trader:

Advantages:
- Sole trader business is very easy to set up. There remain no legal formalities (forms and accounting information) to be done for a sole trader.

-Sale of good and transfers is done solely at the discretion of the owner/trader.

-The trader has complete control over the business. He is now not answerable to any other individual in case of any loss or profit or any other kind of issues.

-The professionalism is maintained by one person, the sole trader himself. He does not have to follow any other person. He can select and maintain his way and pattern of working in his company.

-The trader is solely responsible for decision making in the organisation. He would not held responsible any other person or regret for his decisions as he will be the only one to take decisions.
Disadvantages:
-Load of the whole liability of the company is fully on the sole trader. He is solely responsible for the debts, risks and obligations of the company.

-Intense competition from bigger firms is faced by the sole trader as the bigger firm may not be necessarily as sole trader.

-Additional capital would be a difficult task here. There is no one to guide or to provide some input here as the trader himself is solely responsible for his firm.

-As compared to other companies in the market, the business of a sole trader is considered as a small company, which is the toughest reality.

-Poor work life balance would be a very strong reason here as sole traders who does not believe in employing any other person in his firm would find great difficulty in managing the balance.

(ii)Traditional Partnership

Advantages:

-Capital contribution would be divided here and would become easy to add on cash in the firm if required.

-The profits and losses would be equally shared with the partner.

-Work life balance would be a great support here for both the partners and maybe two or more maybe there.

-Responsibility of work and decision making is shared by both the partners equally. There would be a support system for one partner here.

-It would be very easy to change the legal structure of the firm or the company later on as per the circumstances.

Disadvantages:

-When it would come to risk management, there would be misconceptions and argument among the partners which sometimes even destroys the family relation in traditional partnership.

-All the partners would be liable for all the actions of any one single partner.

-In case of death, insolvency or any reason of leaving partnership of any partner, valuation of assets would become the biggest challenge.

-Decision making make cause a chaos and create conflicts.

(iii)Closely held corporations:

Advantages:

-Closely held corporations are able to generate more profit than the private firms.

-No burden of debts as it will be shared with the investors.

- Advertisement of the company and its brand is done simultaneously.

-Issues related to management among the individuals are easily settled with the help of agreement and the organisation remains unaffected.

Disadvantages:

-They are answerable to all the individuals who have interest in their company.

-Any decision making would be supported by all the stake holders and the investors consent and not solely which is very time consuming and lengthy process.

-Pricing of shares is fully subject to the fluctuations of stock market.

(b)Franchising as a business organisation model:

Advantages:

-Franchising reduces the risk of business failures and provides a reason to be recognised by all through its brand name very easily.

-Reduction in finance as the cost of buying a franchise is saved here.

-If the company is a start up, chances of higher revenues and earnings of profits become very high.

-Enhanced business relation already provided by the franchisor.

-Support and security system offered by the franchisor through the training schemes.

Disadvantages:

-No control over the business as the terms and conditions are already designed in the agreement.

-Other franchisees can establish their own good product and create a tough competition to destroy our repo in the market. Even after having a franchise, it would of no use if the reputation is destroyed.

-The franchise agreement would cost a lot to the franchiser. It requires huge capital investment which would already make the franchiser weak.

-Selling of the franchisee would be a big challenge as the buyer would judge the franchisee on all grounds. Any one of the weak point would result in dissatisfaction of the buyer.

-One negative publicity would be enough to destroy everything and every effort made.

(c) The factors that the potential franchisee must consider before entering a franchise agreement:

-Your circle and the team members must be liable and loyal.

-Proper research on franchising and the franchise that you are buying.

-Quality of the product must be measured properly.

-The scale of control must be checked earlier properly to avoid any ambiguity further.

-Demand of the product must be checked and then one must proceed further.

-The product must be competitive in the market and meet the market norms.

-Training and support offered to the franchisee at the time of purchasing it.

-The terms and conditions mentioned in the agreement must be read carefully.