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Mr. Chan now has concerns about the franchise. The promise of being part of a large organization has been realized. But, with thousands of franchisees, he wonders if he will be in good hands under the parent corporation.
Mr. Chan began his home remodeling business, Happy Home Company, with a saw and a pick-up truck. For the first seven years, Mr. Chan ran the business out of his apartment in a public housing estate and then rented a unit for workshop and showroom from a government-owned factory building in Shamshuipo. The company had gross sales of more than $3 million after ten years.
Home Remodeling International, an Italian franchise system for home remodelers, approached Mr. Chan about a deal. If he bought a franchise, Home Remodeling International offered benefits including a brand name; a professional reputation; a steady and reliable source of all Italian building supplies; discount prices on materials; guaranteed work to customers; training in accounting, sales and marketing; advertising; and a chance to be part of the biggest organization in the remodeling industry. The cost was $100,000 for a franchise fee, a monthly royalty of 6% of sales, and $300 a month for advertising on TV and other effective media.
Mr. Chan attended the training seminars and found the programme was very interesting. The training programme reminded him of everything he had forgotten to implement. Home Remodeling International provided him with a weekly time table, order forms, new stationery, letters for direct-mail advertising, accounting procedures, and the like. Emotionally, though, the changes were not easy. Changing Happy Home Company to Home Remodeling International meant giving up everything he had worked for. Happy Home Company had been his idea, his business, his life. When it changed to Home Remodeling International, Mr. Chan lost part of himself. When it is their own business, they will at times feel beholden to the franchiser (an agreement that stocks have to be purchased from them), and a given share of the profits will have to be paid over. It might also be difficult to change methods from those recommended by them.
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However, Mr. Chan was advised that more public sector flats are being built for ownership to meet a growing demand for them, reflecting a growing trend for remodeling business as well. The Home Ownership Scheme provides flats for sale at prices below market value to lower middle-income families and housing tenants. Since the scheme started in 1978, a total of 222,944 flats, including 68,284 flats produced under the complementary Private Sector Participation Scheme have sold to eligible families in 1995. About 55 per cent of these families are public housing tenants who are required to surrender their rental flats to the authority on obtaining Home Ownership Scheme flats. These surrendered rental flats need remodeling by new tenants as well. All his former customers might purchase a flat for their own. It would increase the chance of doing business with them. Besides, due to the lower market prices, these flat owners would pursue better living environment and decorate theirs flats with better materials. Italian building supplies would be one of their choices. Mr. Chan agreed with the advice and signed the franchise agreement.
Initial results were promising. Marketing costs dropped from 8% to 4.5 % of sales while revenues jumped in the first year to $4,000,000. The size of jobs increased also, resulting in greater profits.
One unexpected result was that Mr. Chan became a business manager rather than a craftsman. Instead of pounding nails, he subcontracted the work to other craftspeople. Because he learned to delegate responsibility, he found time for himself and his family. He has time for lunch and for the first time in ten years went on a vacation in Italy with his family.
Questions for consideration:
- 1. What does it take to be a small business entrepreneur?
- 2. What are the advantages and disadvantages of franchising to Mr. Chan?
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Instructor’s manual:
Topic covered: Small business management - franchise.
Suggested solution:
A small business is defined in Hong Kong context a business entity which requires small amount of capital, operates independently in a local area and employs less than 50 employees.
A franchise is best defined as a continuing arrangement between the parent company and an entrepreneur. It allows the entrepreneur to use all the know-how and experience of the parent company. This includes all the things, which make for success, such as the name, logo, production techniques, training methods, and expertise in general.
The parent company is called the franchiser, and the entrepreneur is called the franchisee. They operate under an agreement, which both have signed, which identifies what can be done and what must be done by both parties. The contract is usually for a period of time with the right to renew available.
Franchising is very popular form of business ownership today. Well known franchises include organization such as Holiday Inn, McDonald’s, Pizza Hut, Avis Rent-A-Car, Kentucky Fried Chicken, Singer Sewing Machine and Coca-Cola bottling plants.
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Q1. Whether starting a new business or working in an established firm, most entrepreneurs:
- 1. Have identified a success goal or vision for the business;
- 2. Are willing to risk time and money;
- 3. Have the ability to plan and organize and to follow through;
- 4. Have hard and do what it takes for success;
- 5. Are willing to put in the effort to develop good relations with customers, employees, suppliers, bankers, and other interested parties.
Q2. Franchise offers its maximum advantages when consideration is given for the interests of the franchisee - Mr. Chan. The advantages are summarized below.
- 1. Sound management procedures, training and decision-making assistance made available by franchiser - the Home Remodeling International.
- 2. Less risk with market-tested and popular products.
- 3. Pre-established promotion and advertising programmes provided on TV and other effective media.
- 4. Possible financial aids for part of purchase price at low interest.
- 5. Credit available in buying inventory supplies.
- 6. Better sourcing of building materials in Italy.
- 7. Assistance with site identification.
Although it would normally appear that most of the advantages accrue to the benefit of the franchisee - Mr. Chan, there are still some disadvantages applicable to him. These include the following:
- 1. Usually Mr. Chan gives up much freedom in management decisions.
- 2. He is obliged to make purchases from franchiser - the Home Remodeling International, even if better prices are available elsewhere.
- 3. His profits are always shared with franchiser either as a percentage or as a flat fee. As in this case, a monthly royalty of 6% of sales.
- 4. Franchise has become very expensive because Mr. Chan paid $100,000 for a franchise fee, a monthly royalty of 6% of sales, and $300 a month for advertising on TV and other effective media.
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