Starting a Business vs Franchise

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Extended Response

Explain the differences of establishing a business from scratch and setting up a franchise. Evaluate the success of franchises in Australia (refer to examples).

There are significant differences between establishing a new business and setting up a franchise. Starting a business from scratch often takes a long time and a large amount of capital to accomplish, but the rewards can be substantial. A franchise is a business that is licensed to trade under a recognised brand name for payment of a fee (e.g. McDonalds, 7-11, etc). A franchisee purchases the franchise from the franchisor and operates under their name while paying fees. The factors involved in choosing one of these two options differ considerably and include the amount of risk, cost, operations and reputation.

Establishing a new business involves the highest amount of risk due to the entrepreneur being solely responsible for everything that occurs in the business. In addition, there is a significant threat of failure for any new business which can result in huge losses for the business owner. Without a previous business reputation, it may prove difficult for entrepreneurs to secure finance which in effect significantly limits their access to funds to pay for establishment costs. Starting a new business gives the owner greater control over all key decisions and operations, as a result allowing the owner to set up the business exactly how they wish. Establishing a reputation for a new business is a slow process since a customer base and marketing campaign needs to be developed to generate sufficient sales for the firm. As a result, a new business will experience a slow growth in profits and may not be able to achieve a high level of profits at the start.

Setting up a franchise presents the lowest risk due to already being established and generally selling widely recognised products. The costs associated in purchasing a franchise vary significantly depending on a number of...
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