Drawbacks of franchising as business organisation model

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Reference no: EM132155996

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.

Reference no: EM132155996

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