Entrepreneurship and Franchising

Ralph Emerson thought he’d been a librarian long enough, and when the opportunity to open a small tobacco, pipe, and cigar shop in the newly renovated downtown business district arose, he was ready to act. Pipe Dreams is a franchisor of smoke shops, and was founded eight years ago by a noted tobacconist in New York City. The concept for the shops is simple, yet sophisticated.

It is simple in the sense that the shops sell only tobacco-related products, but sophisticated in the breadth and quality of the inventory they carry. Each franchise, depending on size, is stocked with inventory selected by the company’s founder. The franchisor finances the shop’s initial inventory. The franchisee is expected to create a decor within predetermined standards that Pipe Dreams establishes. Each franchisee must attend a three-day workshop, outlining the fundamentals of tobacco blending, the merchandising of pipes and cigars, and the techniques of successful business operation.

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The franchise contract requires the franchisee to contribute 1.5% of gross revenue to a national advertising campaign. According to the contract, Pipe Dreams will finance the required fixtures for the store for ten years. Also, the franchisor supplies all inventory at very favorable prices because it purchases in large quantities.

Ralph knows he can buy tobacco products from a variety of wholesalers. He also has some ideas on what would make a tobacco shop successful in this town. Ralph knows that Pipe Dreams franchisees have had a high success rate in the past.

Help Ralph make a decision by outlining the advantages and disadvantages of a franchise agreement.
Assuming that Ralph has adequate capital, would you recommend that he invest in the franchise or open his own tobacco shop? Why?

Solution Preview
Franchising is a term that is used to describe a wide variety of business systems. In franchising, there is a franchise of agreement that is being entered into by someone with an idea for a business (the franchisor), who sells to another person (the franchisee) the rights to use the business name, sell a product, or provide a service to someone else. (from Wikipedia). The territory in which a franchisee can have exclusive control is clearly specified in the agreement and both parties are legally bound by it.

In franchising, the franchisee is able to start up a new business quickly based on the proven trademark which has already been used by the franchisor. …

Solution Summary
The solution presents the definition and description of franchising, franchisor/franchiser and franchisee. It also distinguishes managing own business from entering into franchising to own one’s business. In the problem, Ralph Emerson is having a dilemma in deciding whether he is going to have his tobacco business managed by him directly or becoming a franchisee. The advantages and disadvantages of both are being presented in order to give a better chance for Ralph Emerson to decide on which choice he is going to make.

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